September 30, 2016

The general theory of scientific incompetence

Comment on Paul Krugman on ‘A General Theory Of Austerity?’

Blog-Reference

Paul Krugman explains the world by second guessing the motives of folks he does not agree with: “[The] bottom line is that austerity was the result of right-wing opportunism, exploiting instinctive popular concern about rising government debt in order to reduce the size of the state.” (See intro)

Krugman should know that ‘right-wing opportunism’ is not exactly a profound scientific argument: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.” (Schumpeter)

The very characteristic of the Austerity discussion is that the arguments of BOTH sides have no sound scientific foundation. In other words they are provable false.

The title of Krugman’s post refers to Keynes’s General Theory. Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder since 1936.

Keynes defined 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 two-liner is defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12)

Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of macroeconomics is false, in particular all I=S/IS-LM models.

Allais clearly identified Keynes major fault: “... mais son [Keynes’s] insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70). In other words, Keynes stumbled upon the problems but could not solve them because of his logical insufficiency.

The correct relationship is given by Qre=I-S (Allais, 1993, p. 69) Legend: Qre: retained profit, S: saving, I investment expenditure.

So, Keynes got it wrong 80 years ago and Allais got it right 23 years ago and Krugman did not check anything and is deep in the woods until this day (2014). The same holds for Wren-Lewis.*

Because Keynesianism in all its variants is axiomatically false, the commonplace theory of employment is false by implication.** What is needed is NOT brain dead political blather but the scientifically true general theory of profit, employment and deficit spending. Don’t wait for Krugman, Wren-Lewis and the rest of logical insufficients to deliver it.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
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

* See post ‘I=S: Mark of the Incompetent
** See post ‘The choice between Friedmanian pest and Keynesian cholera

A basket of scientific deplorables

Comment on Paul Krugman on ‘VAT of Deplorables’

Blog-Reference

Paul Krugman argues: “This says that if he [Trump] somehow becomes president, and decides to take the job seriously, it won’t help — because his judgment in advisers, his notion of who constitutes an expert, is as bad as his judgment on the fly.”

What exactly is an economic expert?

“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 have no true theory. Economics is a failed science. What economists have to offer is political opinion without sound scientific foundation.

Paul Krugman still applies IS-LM* and this proves that his scientific judgment is “as bad as his judgment on the fly”.

Egmont Kakarot-Handtke

* See ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

September 29, 2016

The real problem with the economics Nobel

Comment on Lars Syll on ‘The Nobel factor — the prize in economics that spearheaded the neoliberal revolution’

Blog-Reference

Lars Syll argues that the economics Nobel is politically biased: “... the prize was thought to take advantage of the connection with the true Nobel prizes and spearhead a market-oriented neoliberal reshaping of the world.” (See intro)

This is a minor problem, the real problem is in the title: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

The key word is science[s]. Why not simply “Bank of Sweden Prize in Economics”? The original title clearly communicates the claim that economics is a science. This claim is as old as Adam Smith/Karl Marx.

Science is well-defined by the criteria of formal and material consistency: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994)

Neither orthodox nor heterodox economics satisfies the criteria of formal and material consistency. It is a provable fact that neither Walrasianism, nor Keynesianism, nor Marxianism, nor Austrianism is materially/formally consistent.

Accordingly, economics is not a science but what Feynman famously called a cargo cult science.

The Bank of Sweden is legitimized to award prizes to whomever it wants and to push any political agenda it wants. The Bank, though, is NOT legitimized to declare economics as science well knowing that economics has not lived up to scientific standards since the founding fathers.

The scientific community has to see to it, firstly, that the word ‘sciences’ is eliminated from the “Bank of Sweden Prize in Economic Sciences”. The general public has to be informed that the 200 year old claim and the actual state of economics do not match and that ALL economic policy guidance, i.e. independently of political orientation, lacks a sound scientific foundation. It follows, secondly, that economists have to be expelled from the scientific community. It follows, thirdly, that organizations like AEA, Royal Economic Society, Verein für Socialpolitik etcetera refrain from speaking in the name of science.

The real problem with the Bank of Sweden Prize is that it may give rise to a claim for damages in the case of severe depression/unemployment which is ultimately caused by provable false economic theory.

Egmont Kakarot-Handtke

Sticky prices or sticky brains?

Comment on David Glasner on ‘Price Stickiness Is a Symptom not a Cause’

Blog-Reference and Blog-Reference on Sep 30

The discussion between Nick Rowe and David Glasner suffers from the obvious fact that they have no common and well-articulated model of the economy at the back of their minds. The arguments are drawn either from the Walrasian general-equilibrium-theory pool or from the Keynesian monetary-theory-of-production pool. What makes the discussion surreal is that both Walrasianism and Keynesianism are known to be failed approaches.

The elementary Walrasian story of the market economy goes roughly as follows. There are different types of markets (basically product, labor, money, real assets, financial assets) which function according to what Leijonhufvud called the totem of economics, that is, supply-function-demand-function-equilibrium and interact such that under the ideal condition of full price flexibility in each market all markets clear. It has ALWAYS been admitted that in the real world conditions are not ideal. The claim is that this does not affect the benchmark function of the Walrasian model. The elementary story is backed up by general equilibrium theory which provides the formal proof of the existence of a market clearing price vector.

The proof of the Walrasian story is worthless because its premises are false. Fact is that (i) the different market types work on DIFFERENT principles (2011), (ii) all three analytical elements of “the” market, i.e. supply function, demand function, equilibrium, are nonentities, (iii) the underlying behavioral assumptions are false.

In sum, the Walrasian story of the market economy is axiomatically false. The axioms are given with this 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, 1985, p. 147)

Axiomatically false means that the theory/model is BEYOND repair and has to be fully REPLACED. The replacement of the axiomatic foundations is what methodologists call a paradigm shift. Nothing less will do.

Nick Rowe has not realized this and reiterates the Walrasian story with a new spin which is as senseless as adding epicycles to the Geo-centric model.

David Glasner is already enlightened: “Most of all, they represent an uncritical transfer of partial-equilibrium microeconomic thinking to a problem that requires a system-wide macroeconomic approach. That approach should not ignore microeconomic reasoning, but it has to transcend both partial-equilibrium supply-demand analysis and the mathematics of intertemporal optimization.” This crucial insight is beyond sticky Nick and others of the Walrasian ilk.

To rise above Walrasian and Keynesian drivel requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations (2014).* New macrofoundations deliver the materially/formally consistent general theory of profit, employment, interest and money.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See also ‘From Orthodoxy to Heterodoxy to Sysdoxy’ and ‘How to restart economics

September 27, 2016

The choice between Friedmanian pest and Keynesian cholera

Comment on Brad DeLong on ‘The Stakes of the Helicopter Money Debate: A Primer’

Blog-Reference

Brad DeLong summarizes: “The Great Moderation of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus of mainstream economists at least, that Keynes had been wrong and Friedman had been right. But in the aftermath of 2007 it became very clear that they — or, rather, we, ... — were very, tragically, dismally and grossly wrong.”

And then he continues: “Now we face a choice ...”

No, there never has been a choice between the Friedmanians and Keynesians because BOTH are wrong. Both are groping in the dark with regard to the two most important features of the market economy: the profit mechanism and the price mechanism. Because of this, the discussion about monetary and fiscal policy, or helicopter money for that matter, never had more scientific content than free ink-blot association.

“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, p. 30)

Economists have no true theory. Economics is a failed science. What Friedmanians and Keynesians have to offer is political opinion without sound scientific foundation.

For the proof let us very briefly turn to the formally and empirically correct employment theory (2012; 2014). The basic version of the objective structural employment equation 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).
(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 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 the role of aggregate demand, which have been commonsensically right but formally defective. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist hallucinates. 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.

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

The second alternative is preferable to Keynesian deficit spending* but it is the very opposite of what the broad consensus always told the world: “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, 1997, p. 11)

Both, the Friedmanian and Keynesian approaches have produced misleading policy advice. Unemployment is ultimately the result of theory failure. Before economists can hope to be taken seriously they have to do some scientific homework.

Egmont Kakarot-Handtke


References
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. (2014). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
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, volume 2, pages 3–27. Oxon: Routledge.

* See post ‘Keynesianism as ultimate profit machine

***
REPLY to Ray LaPan-Love on Sep 28

You say: “I get the sense that you expect too much from the ‘dismal science’.”

I get the sense that you have some trouble with clear thinking. It is very well known and communicated each year in no uncertain terms that economics is a science: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

Science is well-defined by the criteria of formal and material consistency: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994)

It is a provable fact that neither Walrasianism, nor Keynesianism, nor Marxianism, nor Austrianism is materially/formally consistent. All these approaches are axiomatically false, that is, beyond repair.*

If you think that it is ‘too much’ to demand from economics to live up to scientific standards then you have to see to it, firstly, that the word ‘sciences’ is eliminated from the “Bank of Sweden Prize in Economic Sciences”. 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 economists have to be expelled from the scientific community. It follows, thirdly, that organizations like the AEA refrain from speaking in the name of science.

Your argument misses the point. I expect nothing from the currently active and failed economists other than to drop the claim that they are doing science. This claim is ‘too much’.

* See post ‘All models are false because all economists are stupid

The trouble with Naked Keynesianism

Comment on Matias Vernengo on ‘The Trouble with Paul Romer’s Angriness’

Blog-Reference

In his recent paper ‘The Trouble With Macroeconomics’ Paul Romer put DSGE and its main proponents ― Lucas, Sargent, Prescott ― to rest. From the fact that microfounded macro is an officially buried research program, though, does not follow that Keynesian macro can now be taken seriously.

Keynes, too, based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder in 85 years.

For details see ‘How Keynes got macro wrong and Allais got it right
and ‘All models are false because all economists are stupid

Egmont Kakarot-Handtke

September 26, 2016

How Keynes got macro wrong and Allais got it right

Comment on Lars Syll on ‘Good advice to aspiring economists’

Blog-Reference and Blog-Reference on Sep 28

Keynes based macroeconomics on logically and conceptually defective foundations and neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized his foundational blunder in 85 years (2014).

Keynes defined 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 two-liner is defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12)

Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of macroeconomics is false, in particular ALL I=S/IS-LM models (2011; 2013).

Allais clearly identified Keynes major fault: “... mais son [Keynes’s] insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70). In other words, Keynes saw the problems but could not solve them because of his logical insufficiency.

The correct relationship is given by Qre=I-S (Allais, 1993, p. 69) Legend: Qre: retained profit, S: saving, I investment expenditure.

It is pretty obvious from this equation that I and S are NEVER equal, neither ex ante nor ex post. The argument that I=S is merely an accounting identity proves only that, as a general rule, economists are too stupid to understand the elementary mathematics of accounting (2012). Allais understood it.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. 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