June 28, 2017

Profit and stupidity

Comment on Barkley Rosser on ‘Comments on Profit and Capital’

Blog-Reference

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008). This translates into: after 200+ years economists still do not know what profit is.

Barkley Rosser quotes Marx, Piketty, Ricardo, the Austrians, and the textbooks in order to show how economists have dealt with profit and closely related concepts. Yes, all economists/schools had their own definition of profit which only proves, in Popper’s words: “This shows that they are not all true. For if they conflict, then at best only one of them can be true.” In fact, ALL are provable false.#1

In his lengthy post Barkley Rosser throws in a host of phenomena that are superficially related to profit (capital, machinery, depreciation, waiting, roundaboutness, risk, profit distribution, etcetera) and thus thoroughly messes the whole issue up. This is the tried and tested swampification strategy of confused confusers. In order to determine profit all these related phenomena have to be put aside in the first round for reintroduction at a later stage. The lethal analytical mistake is to automatically couple profit and capital. Both have to be properly kept apart. Barkley Rosser’s methodological incompetence reveals itself already in the thread’s title.

For the determination of monetary profit of the economy as a whole one has to start with the most elementary case of a pure consumption economy without investment, government, and foreign trade.#2 In this elementary economy three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
In case (i) the monetary saving of the household sector Sm≡Yw-C is zero and the monetary profit of the business sector Qm≡C-Yw, too, is zero.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds Qm+Sm=0 or Qm=-Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. Note that profit has NOTHING at all to do with capital. To mindlessly couple profit and capital has been the crucial analytical blunder of the founding fathers from which economics has not recovered until this day. These 200+ years of analytical sloppiness and confusion are a telling metric for the scientific incompetence of economists.#3

Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, capital, power, waiting, risk, greed or the smartness of capitalists. Overall profit/loss is determined in the most elementary case by the change of the household sector’s debt.#4 This is a testable proposition.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith
#2 The macrofoundations approach starts with three systemic (= behavior-free) axioms: (A0) The objectively given and 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. (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. For a start it holds X=O.
#3 See also ‘How the intelligent non-economist can refute every economist hands down
#4 For more details see cross-references Profit

Marx, the moron

Comment on Chris Dillow on ‘Why libertarians should read Marx’

Blog-Reference and Blog-Reference and Blog-Reference

There is political economics 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 consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong.

Marx, clearly, was NOT a scientist but a political agenda pusher. However, after the scientific triumphs of Copernicus, Kepler, Galileo, Newton, Laplace, Leibniz etcetera agenda pushing had to be dressed as science. This gave rise to what Feynman famously called cargo cult sciences.

What Marx did was sociology, history, storytelling, prophesy and agenda pushing. He had NO idea how the monetary economy works because he never figured out what profit is.* That is rather bad for an economist but what is worse is that After-Marxians did not spot and rectify Marx’s blunders in the past 130+ years.

What we actually have is the pluralism of provable false theories. Walrasianism, Keynesianism, Marxianism, Austrianism look antagonistic on the surface but have one essential thing in common: they are all fake science.

Egmont Kakarot-Handtke

* See ‘Profit for Marxists


Related 'Economics: 200+ years of scientific incompetence and fraud' and 'The end of political economics'

The minimum wage debate: a showpiece of economists’s hereditary idiocy

Comment on Sandwichman on ‘Seattle Minimum Wage’

Blog-Reference and Blog-Reference

“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)

Fact is that economists do NOT have the true theory. Fact is, in methodological terms, that economics is axiomatically false. The lethal blunder comes under the label of microfoundations or as Krugman put it: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

The methodological blunder of the minimum wage debate consists in partial analysis and microfoundations. This type of analysis NEVER leads to results that can be generalized, but always to results that change from place to place and from time to time. So, this type of analysis (i) runs directly into the Fallacy of Composition, and (ii), remains forever inconclusive.

Interim result: The traditional microfoundations approach is as false as one can get and has to be fully replaced by the macrofoundations approach.

The correct macro employment equation#1 is reproduced on Wikimedia.#2 From this objective-structural-systemic relationship follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete structural-systemic employment equation is a bit longer and contains in addition the public sector and the foreign trade sector.

Item (i) and (ii) cover the familiar arguments about how effective demand affects employment. Item (iii) embodies the macroeconomic price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

From this follows:
(1) The average wage rate has to be prevented from falling because this leads to rising unemployment and deflation. One possibility is to fix a minimum wage rate which increases over time. Note that this is a SYSTEMIC necessity and has NOTHING to do with social policy.
(2) The minimum wage rate has to be implemented nationwide (strictly speaking world wide). To implement it locally or for certain branches is absolutely counterproductive.
(3) The implementation has to be done intelligently. It is, for example, stupid to kill the marginal firms with the introduction of a nationwide minim wage.
(4) Given their track record of idiocy, economists have to be kept out of further discussion and implementation.

Minimum wage policy has to be carried out under the macroeconomic condition w greater than p+r+pr, that is roughly speaking, employment increases if the increase of the average wage rate w is greater than the increase of average price p and productivity r.

To make local and partial minimum wage increases will in all eternity lead to inconclusive results and only keep a bunch of incompetent scientists busy with senseless debate, inconclusive empirical studies, and brain-dead blog posts.

Egmont Kakarot-Handtke

#1 For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 Wikimedia


Related 'Economics and the Fallacy of Insufficient Abstraction' and 'The role of labor and business in a well-organized society' and 'Rethinking the Phillips curve' and 'Attention: there are THREE types of inflation' and 'Textbooks and the mental cloning of dumb economists'. For more details of the bigger picture see cross-references Employment

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REPLY to Barkley Rosser on Jun 28

Note that the EconoSpeak admin=your sidekick Sandwichman has deleted since Jun 24 the following posts:
The minimum wage debate: a showpiece of economists’s hereditary idiocy
Note on Marshall’s Magic Wand
Economics and the Fallacy of Insufficient Abstraction
The role of labor and business in a well-organized society

In these posts and the references you find the detailed refutation of your unqualified blather.*

Egmont Kakarot-Handtke

* See also cross-references Employment and cross-references Incompetence

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REPLY to Barkley Rosser on Jun 29

I agree with you about the brilliance of Joan Robinson which is encapsulated in her assessment of economics: “Scrap the lot and start again.”

The others, who are brilliant in your eyes, will not even make it into a footnote of the history of science. With regard to Adam Smith I concur with Schumpeter: “… 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.” If this is your definition of brilliance you are probably one of the dullest readers.

For an assessment of the rest of your list see:
Marx, the moron
Walras is long gone
How Keynes got macro wrong and Allais got it right
Hayek and other informationally retarded proto-economists
The father of modern economics and his imbecile kids
How Arrow pushed economics over the cliff

Economics is a failed science and those you call brilliant messed it up.

June 27, 2017

Empiricism, or looking through the microscope at the universe

Comment on Mark Thoma on ‘An Empirical Turn in Economics Research’

Blog-Reference

This is what empiricists overlook or ignore: “Indeed, there is no such thing as an uninterpreted observation, an observation which is not theory-impregnated.” (Popper)

Now, the fact of the matter is that theoretical economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong. What we actually have is the pluralism of provable false theories.

A theory is the best possible mental representation of reality. If the theory is false empirical tests either lead to a refutation or to inconclusive results. And this is exactly what happened: “… suppose they [the economists] did reject all theories that were empirically falsified … Nothing would be left standing; there would be no economics.” (Hands)

Economics is a failed science and the lethal methodological blunder happened at the level of theory. Accordingly, what is needed is nothing less than a paradigm shift: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman)

In order to avoid the reproach of being lost in vacuous theorizing economists escape to empiricism, in the extreme case to “measurement without theory”. But without the true theory at the back of their minds empiricists cannot rise much about the trivial, commonsensical, and the spatio-temporal particular that defies generalization. Thus, economics degenerates to folk psychology, folk sociology, folk history, and number crunching. The press and the general public likes this stuff very much because it is “realistic”. But storytelling decorated with suggestive facts/data is not science, it is what Feynman called cargo cult science.

All economic schools have one thing in common: they do not understand the scientific method. Their approach can roughly be characterized as microfoundations and bottom up: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

This, in a nutshell, is the lethal defect of economics because methodologically it holds that (i) there is NO such thing as an invariant of human behavior, and (ii), NO way leads from the explanation of Human Nature/motive/behavior/action to the explanation of how the economic system works. In other words, microfoundations and bottom-up never leads to an understanding of how ‘the economy’ works.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was, in principle, the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations.#1

The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations which define ‘the economy’, down through intermediate levels (sectors, branches, firms, households) to the individual. What empiricists do not understand is that NO amount of microeconomic research ever leads to the understanding of ‘the economy’.

The microfoundations approach had been doomed to failure already 140+ years ago. The current empirical turn in economic research does not help much as long as the defective theoretical foundations are still in place. The correct sequence is: before the empirical turn comes the theoretical turn, that is, the paradigm shift.#2

What the representative economist still does not understand is that economics is NOT a social science but a system science and that if it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 See ‘The unfinished Keynes
#2 For details see ‘First Lecture in New Economic Thinking

June 26, 2017

The end of political economics

Comment on Ravi Kanbur on ‘W. Arthur Lewis and the tradeoffs of economics and economists’

Blog-Reference and Blog-Reference on Jun 28 and Blog-Reference

There is no such thing as economics. There are TWO economixes: political economics 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 consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong. What we actually have is the pluralism of provable false theories.

Theoretical economics is scientifically unacceptable. Because of this, economics has nothing to offer in the way of a scientifically well-founded advice: “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)

Fact is that neither Orthodoxy nor Heterodoxy has the true theory and that, by consequence, economic policy guidance of BOTH sides has NO sound scientific foundation. Economists should no longer pretend to do science but openly push their respective political agendas.

Even if economists had the true theory they would have NO political mandate. There is NO such thing as a trade-off between theoretical and political economics. It was John Stuart Mill who told economists that they must decide themselves between science and politics: “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.”

Since the founding fathers economists violate the principle of the separation of science and politics. Economics is what Feynman famously called a cargo cult science and neither right wing nor left wing economic policy guidance has a sound scientific foundation since Adam Smith/Karl Marx. Political economics has produced NOTHING of scientific value in the last 200+ years. It is high time that economics frees itself from the all-pervasive and all-corrupting grip of politics.

What Burke termed ‘one of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion’ is a POLITICAL question entirely OUTSIDE the sphere of economics. Economists have to step down from the political soap box which the founding fathers have illegitimately usurped 200+ year ago.

Egmont Kakarot-Handtke


Related 'Economics: 200+ years of scientific incompetence and fraud'. For details of the bigger picture see cross-references Political economics and cross-references Incompetence

Note on Marshall's Magic Wand

Comment on Sandwichman on ‘Marshall's Magic Confidence-Wand’

Blog-Reference and Blog-Reference

Marshall explains commercial depression: “The chief cause of the evil is a want of confidence.” and “In short there is but little occupation in any of the trades which make Fixed capital.”

No taxi driver could explain it better. This kind of “explanation” is paradigmatic for the level of economic science and for these brain-dead trivialities Marshall is still ackowledged as great economist. One trembles to contemplate what the economics of his peers had looked like.

Update for students: Marshall’s economics has already been dead in the cradle in 1890. That he and his Principles are not buried and forgotten is a sure indication of the utter scientific incompetence of later generations of scholars. Marshall’s supply-demand-equilibrium is one of the most ridiculous constructs in the history of the sciences but still the centerpiece of every economics textbook.

For details see:
Marshall: a monument of scientific incompetence
Marshall and the Cambridge school of plain economic gibberish
Essentials of Constructive Heterodoxy: The Market

Egmont Kakarot-Handtke

June 25, 2017

Economics and the Fallacy of Insufficient Abstraction

Comment on Sandwichman on ‘”If There Is Any Such Thing”: Why read Hoxie on theory?’

Blog-Reference

What is the core problem of economics? Bagehot made it clear back in 1885: “It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ‘unreal words,’ ― that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark ― sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend ‘how any one can talk such nonsense.’ Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them.”

This, though, was not news because J. S. Mill reported already in 1874 about the two classes of inquirers.

“It has been again and again demonstrated, that those who are accused of despising facts and disregarding experience build and profess to build wholly upon facts and experience; while those who disavow theory cannot make one step without theorizing. But, although both classes of inquirers do nothing but theorize, and both of them consult no other guide than experience, there is this difference between them, and a most important difference it is: that those who are called practical men require specific experience, and argue wholly upwards from particular facts to a general conclusion; while those who are called theorists aim at embracing a wider field of experience, and, having argued upwards from particular facts to a general principle including a much wider range than that of the question under discussion, then argue downwards from that general principle to a variety of specific conclusions.”

Bottom line: there are two types of economists, the upwarders and downwarders. This distinction overlaps with the distinction between induction and deduction which in turn overlaps with the distinction between practitioners and theoreticians.

The core problem of economics is that neither upwarders nor downwarders were particularly successful. After 200+ years economics is still at the proto-scientific level.

Methodologically, unionists are upwarders: “Unionists are not theorists; unionism is an eminently practical thing.” (Hoxie). “Theory and trade unionism are almost contradictory terms.” (Arnos) As a result, unionists have no true theory of how the economy works and how the aggregate labor and product markets interact. In other words, union policy never had sound scientific foundations but always remained glued to the phenomenological surface. Unionists did not realize what Marx already clearly saw: “That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy.”

Because they have always been glued to the immediately practical of the here and now unionists have never figured out what profit is.#1 As a collateral damage they got stuck at the naive concept of exploitation and never arrived at the concept of crossover exploitation.#2

Fact is that the myopic upwarders, i.e. ‘these people who live and move among the facts’, i.e. labor and business, never arrived at a consistent profit and employment theory. But, and this is one of the worst scientific scandals in human history, neither did Walrasians, Keynesians, Marxians, and Austrians.#3

Both, the upwarders and downwarders fell victim to the Fallacy of Insufficient Abstraction and failed to explain how the actual economy and the labor market works. Time to throw Hoxi’s and Marshall’s and Walras’ and Keynes’ employment theories on the big heap of proto-scientific garbage.#4

Egmont Kakarot-Handtke

#1 See ‘Profit for Marxists
#2 See ‘The thing with profit and exploitation
#3 See ‘Unemployment ― the fatal consequence of economists’ scientific incompetence’ and ‘Have data, lack theory
#4 For the correct approach see ‘The role of labor and business in a well-organized society


Related 'Rethinking the Phillips curve' and 'Attention: there are THREE types of inflation' and 'Economic bungee jumping without cord'. For more details of the bigger picture see cross-references Employment

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ADDENDUM to Sandwichman on Jun 26

It is a characteristic trait of economics that problems are never solved but endlessly recycled. This explains why economics made no progress since Adam Smith: “... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower).

Economics is a bit like Nietzsche’s Éternel Retour de la pensée la plus lourde. Among the best known examples are capital theory, I=S, lump of labor theory, Say’s Law, Profit Theory. These are monuments of the scientific incompetence of economists.

Your recycling of these issues is a waste of time. Obviously it escaped your attention that the correct profit and employment theory is available on EconoSpeak and elsewhere. For analytical entry points see:
Economics and the Fallacy of Insufficient Abstraction
The role of labor and business in a well-organized society
Essentials of Constructive Heterodoxy: Say's Law
The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment