November 19, 2017

Dilettantes at the end of the coal-pit

Comment on Jo Mitchell’s ‘Dilettantes shouldn’t get excited’

Blog-Reference

As Hume said, “... 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.”

With DSGE, Walrasian economics has, after 140+ years, reached the end of the coal-pit. Lacking sound scientific judgment, though, Christiano/Eichenbaum/Trabandt maintain: “People who don’t like dynamic stochastic general equilibrium (DSGE) models are dilettantes. By this we mean they aren’t serious about policy analysis…”

Science is NOT about like/dislike but about true/false. Fact is that DSGE is provably false. Because of this, all policy proposals that have ever been derived from DSGE models lack sound scientific foundations.

Science is about the true theory. The characteristic of science is the insistence on 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)

Economics pretends to be a science but is what Feynman called a cargo cult science “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Economists lack genuine scientific instinct/ambition: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. (Schumpeter, 1946)

Theory construction starts since 2000+ years with clearly stated premises#1: “To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter)#2

Not only DSGE has failed at constructing the “simple model”. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept profit wrong.

At the end of the coal-pit, the lethal methodological blunder of DSGE is quite obvious: microfoundations are false since Jevons/Walras/Menger. And Keynes’ attempt to move from microfoundations to macrofoundations failed.#3

The methodologically correct action in the given situation is the paradigm shift. False Walrasian microfoundations and false Keynesian macrofoundations have to be replaced by true macrofoundations.

Economics is a failed/fake science. At the end of the coal-pit, it is now quite obvious that scientific dilettantism leads the representative economist astray since 200+ years.

Egmont Kakarot-Handtke

#1 “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.” (Aristotle)
#2 Microfoundations are given with this verbalized axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#3 How Keynes got macro wrong and Allais got it right


Related 'Yes, economics is a bogus science' and 'From false microfoundations to true macrofoundations' and 'First Lecture in New Economic Thinking' and '10 steps to leave cargo cult economics behind for good'. For details of the big picture see cross-references Scientific Incompetence.

November 18, 2017

Why Heterodoxy is no real alternative to mainstream economics

Comment on Lars Syll on ‘Why Krugman and Stiglitz are no real alternatives to mainstream economics’

Blog-Reference and Blog-Reference

Mainstream economics is a failed/fake science, that much is obvious. Only a moron can take DSGE seriously. The problem is that there are still so many of them around. Why this is so is a deep sociological question. Even deeper is the question why Heterodoxy never developed a real alternative to mainstream economics.

Lars Syll noticed the obvious, that is, alleged new economic thinking has never been more than putting lipstick on the dead Walrasian pig: “Despite all their radical rhetoric, Krugman and Stiglitz are — where it really counts — nothing but die-hard mainstream neoclassical economists. Just like Milton Friedman, Robert Lucas or Greg Mankiw.” This, however, is not a sensational new insight. After all, Krugman tells anybody on any occasion that “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Anyone who expects that an orthodox economist honors the scientific protocol and retires quietly after he has been refuted has not studied the history of economic thought. Economists violate scientific standards since 200+ years: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern)

Not only Orthodoxy violates scientific standards and blathers on as if nothing had happened but Heterodoxy, too. What we actually have is the pluralism of false theories. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. Neither Orthodoxy nor Heterodoxy satisfies well-established and well-known scientific standards. Neither Orthodoxy nor Heterodoxy has achieved anything of scientific value.#1

Take Adam Smith and Issac Newton as reference points. How much knowledge did science produce and how much did the cargo cult science economics produce in roughly 200 years? Economists live either in the maximization-and-equilibrium world or in the Keynesian world or in the pluralistic world of anything goes. All three worlds are hallucinatory.

Lars Syll buries Orthodoxy for good: “No matter how many thousands of technical working papers or models mainstream economists come up with, as long as they are just ‘wildly inconsistent’ axiomatic variations of the same old mathematical-deductive ilk, they will not take us one single inch closer to giving us relevant and usable means to further our understanding and possible explanations of real economies.”

True, but to repeat this in thousands of posts on Heterodox blogs does not help much either: “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.” (Blaug)

This is the enigma of economics: why does Heterodoxy “not take us one single inch closer to giving us relevant and usable means to further our understanding and possible explanations of real economies?”#2 Fact is that Heterodoxy is not part of the solution but part of the problem.

In order to get out of the proto-scientific mess, economics needs a paradigm shift.#3 Nothing less will do. Both Orthodoxy AND Heterodoxy is proto-scientific rubbish — or worse.

Egmont Kakarot-Handtke

#1 Yes, economics is a bogus science
#2 For details of the big picture see cross-references Failure of Heterodoxy
#3 From false microfoundations to true macrofoundations


Related 'Not big news: political economics is a failure' and 'Economics is NOT a science of behavior' and 'Where modern macroeconomics went wrong' and 'Heterodox schizo'.

November 16, 2017

Yes, economics is a bogus science

Comment on John Ioannidis/Los Angeles Times on ‘Economics isn’t a bogus science ― we just don’t use it correctly’

Blog-Reference and Blog-Reference on Nov 17

John Ioannidis argues: “But these crises and scandals do not mean that the SCIENCE of economics is inherently unreliable. Most of them occurred because we ignored what we knew. Perhaps most obviously, we deputized ― and continue to deputize ― the wrong people as authorities. … But the opinions of wealthy tycoons are often dissociated from SCIENTIFIC evidence, out of touch with reality and all too plainly wrong. … Similarly, politicians rarely use economic SCIENCE to make decisions and set new laws. Indeed, it is scary how little SCIENCE informs political choices on a global scale. Those who decide the world’s economic fate typically have a weak SCIENTIFIC background or none at all.”

John Ioannidis desperately tries to convince the audience that economics is a SCIENCE. Economists have attempted this from Adam Smith/Karl Marx onward up to the “Bank of Sweden Prize in Economic SCIENCES in Memory of Alfred Nobel”.

Fact is that economics is a failed/fake science or what Feynman called a cargo cult science.

Strictly speaking, 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.

For non-economists, the most important thing to realize is that theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years.

The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL got the foundational concept of the subject matter ― profit ― wrong.#1, #2

The fact that economists do not know what profit is makes economics a proto-science comparable to medieval physics before the foundational concept of energy was properly defined and understood. Methodologically it holds since 2000+ years: “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.” (Aristotle)

So, when the premises (foundational concepts, axioms, primitive propositions, postulates, principles, hardcore assumptions, etc) are false the whole analytical superstructure is false and NO SCIENTIFIC knowledge of a thing is produced.

Because economics is a failed/fake science it has to be reconstructed from scratch. In methodological terms, economics needs a paradigm shift, that is, Walrasian microfoundations and Keynesian macrofoundations have to be scrapped and fully replaced by consistent (= certain, true, and primary) macrofoundations.

John Ioannidis does not understand this because he is a bogus scientist.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith
#2 “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008) For details of the big picture see cross-references Profit


Related 'Keynes, Euclid, and economic methodology' and 'Economics: 200+ years of scientific incompetence and fraud' and 'Heterodoxy, too, is scientific junk' and 'The real problem with the economics Nobel' and 'Economics: a science without scientists' and 'There is NO such thing as an economic expert' and 'Schizonomics' and '10 steps to leave cargo cult economics behind for good'. For details of the big picture see cross-references Failed/Fake scientists and cross-references Scientific incompetence.

November 15, 2017

Full employment through the price mechanism

Comment on Bill Mitchell on ‘Automation and full employment ― back to the 1960s’

Blog-Reference and Blog-Reference

Bill Mitchell argues “A currency issuing government has the ability to address change in a timely way so as to minimize the effects of disruptive innovation by maintaining full employment and keeping the economy on track. It’s a matter of maintaining demand so resources that technological innovation and increased productivity make available are not idled owing to lack of demand.”

This is not false but only the first half of the correct employment theory. Bill Mitchell argues within the familiar Keynesian macro framework. He has not realized that Keynes’ employment theory provably false.#1

The elementary version of the correct (objective, systemic, behavior-free, macrofounded#2) Employment Law is shown on Wikimedia.#3


From this equation follows:
(i) An increase of the expenditure ratio ρE leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρE greater than 1 indicates a budget deficit = credit expansion, a ratio ρE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio ρF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, the public sector, and foreign trade.

Item (i) and (ii) cover Keynes’ familiar arguments about aggregate demand. The factor cost ratio ρF  as defined in (iii) embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what microfounded economics teaches.

With regard to automation then follows (under the initial condition of I given and ρE=1 and P constant) that the average wage rate has to rise in lockstep with productivity in order to keep ρF constant and employment at the given level.

There are TWO set screws for controlling employment, i.e. ρE and ρF. Bill Mitchell completely ignores the macroeconomic price mechanism which is formally embodied in ρF.

False theory leads to false policy guidance. With their defective employment theory, economists ― including Post Keynesians and MMTer ― bear the intellectual responsibility for the social devastation of mass unemployment.#4

Egmont Kakarot-Handtke

#1 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 The macrofoundations approach starts with three systemic 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 Wikimedia, Employment Law
#4 For details of the big picture see cross-references Employment

***
REPLY to Kaivey on Nov 15

Stop hallucinating and learn to read!

The title of my post is ‘Full employment through the price mechanism’. It is shown that ― for systemic reasons ― the average wage rate must rise faster than the productivity in order to move towards full employment and that the average wage rate must rise with the same rate as productivity in order to maintain full employment and price stability.

I made it quite explicit that “This is the OPPOSITE of what microfounded economics teaches.” Your Pavlovian waffle about the advocates of the free market system is entirely beside the point.#1

You say “MMT is a way of tweaking the machine to run at a more optimum level taken into account people’s needs, psychology, desires, and wants, and the greater good of the collective society.”

Dream on. MMT is proto-scientific garbage. The employment theory is provably false since Keynes.#2 The political claim that MMT fights for the little man (Kelton: a pony for every American) is rancid soap opera stuff.#3

For the ‘greater good of the collective society’ MMTer have to be expelled from the scientific community.

#1 The market economy is inherently unstable and economists never grasped it
#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 MMT: Money-making for the one-percenters

***
REPLY to ANC Driver on Nov 17

There are two issues here: employment and profit.

Profit, in turn, comes in two forms: monetary profit Qm and distributed profit Yd. This gives one the Profit Law for the elementary production-consumption economy as Qm=Yd−Sm. Legend: Qm monetary profit, Yd distributed profit, Sm monetary saving. Note that there is a positive feedback loop between profit and distributed profit. This, by the way, sinks the idea of economic equilibrium.

For the investment economy including government and excluding foreign trade, macroeconomic profit is given by Qm=Yd+(I−Sm)+(G−T). This compares to the original MMT balances equation (S−I)+(T−G)=0 or 0=(I-S)+(G-T).#1 The equations clearly tell everybody that MMT deals with a zero profit economy ― no profit, no distributed profit. Nobody has ever seen a zero profit economy. So the whole of Modern Monetary Theory is vacuous blather.

This means, of course, that MMT employment theory, too, is vacuous blather. The Employment Law for the closed economy is shown on Wikimedia.#2, #3

The Employment Law tells everyone that the average wage rate must rise faster than productivity in order to achieve full employment. This is a testable proposition because the Employment Law consists of measurable variables.

It is only a question of time until MMT is empirically refuted.

#1 Wikipedia, Modern Monetary Theory
#2 Wikimedia, Employment Law, including profit distribution
#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

November 12, 2017

MMT: The one deadly error/fraud of Warren Mosler

Comment on Warren Mosler on ‘Seven Deadly Innocent Frauds of Economic Policy

Blog-Reference

Warren Mosler asserts: “Deadly Innocent Fraud No.1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow. Fact: Federal government spending is in no case operationally constrained by revenues, meaning that there is no ‘solvency risk.’“

Operationally true, of course. With regard to the economy holds, the Legitimate Sovereign can do anything. The two questions, what is legitimate and who is the sovereign has to be discussed and decided in the political realm. What Legitimate Sovereignty means in concrete detail is NOT an issue for economics ― understood as science. It should be clear, though, that from the fact that the government is not operationally constrained to kill the whole population does not logically follow that this is legitimate. Legitimacy entails operational self-constraint. From the fact that government spending is not operationally constrained does not logically follow that it is legitimate. From the fact that the government is not constrained in creating any amount of money does not logically follow that this is ‘good’ economic policy. The detailed discussion about operational feasibility distracts from the core of the matter.

The core of economics is the question of how the monetary economy works and how deficit spending affects employment, income, profit, the creation/destruction of money, absolute and relative prices, growth, nominal and real distribution over the whole cycle from the origination of private and public debt to its full redemption.

Warren Mosler is right on all operational details but he does not get the big picture. He is, like the economists he criticizes, an incompetent scientist and inexcusably bad at macroeconomics.#1 The common defect of all schools of economics is macroeconomic profit theory.#2 Warren Mosler’s MMT movement is no exception.

“Deadly Innocent Fraud No.2: With government deficits, we are leaving our debt burden to our children. Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.”

True, except for the fact that MMTer confuse (or play a shell game with) the words we, us, and our.#3 Debt or no debt makes a huge difference for the DISTRIBUTION of real output (and accumulated real wealth) between the ninety-nine percenters and the one-percenters ― “we” and “our” in ‘We owe the debt to ourselves’ refer to DIFFERENT people.#4

“Deadly Innocent Fraud No.3: Federal Government budget deficits take away savings. Fact: Federal Government budget deficits ADD to savings.” Or “Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us ― businesses and households, residents and non residents ― what is called the ‘non government’ sector. In other words, government deficits equal increased ‘monetary savings’ for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”

Unfortunately, MMTers got National Accounting wrong.#5 Fact is that government deficits add NOT to OUR savings but to profit. It holds Public Deficit = Private profit. Not to realize this (or to shell game it away) is the one deadly error (fraud) of MMT.#6

“Deadly Innocent Fraud No.6: We need savings to provide the funds for investment. Fact: Investment adds to savings.” Or “I like to say it this way: ‘Savings is the accounting record of investment.’”

This is rubbish since Keynes. The axiomatically correct relationships are Qm=−Sm in the case of the pure production-consumption economy, Qm=I−Sm in the case of the investment economy, Qm=(I−Sm)+Yd+(G−T)+(X−M) in the general case. Legend: Qm monetary profit, Sm monetary saving, I investment expenditures, Yd distributed profit, G government expenditures, T taxes, X export, M import.

Saving is NEVER equal to investment. Therefore, all I=S and IS-LM models are provably false and this includes Post Keynesianism and MMT.#7

With MMT policy, Warren Mosler has found a way to endorse full employment, healthcare, and other social agendas and to increase at the same time the business sector’s profit with the help of the sovereign money issuing state.#8

Egmont Kakarot-Handtke

#1 For the point-by-point refutation see cross-references MMT
#2 The profit theory is false since Adam Smith
#3 On the saying “We owe the debt to ourselves”
#4 MMT and the promotion of Wall Street socialism
#5 Rectification of MMT macro accounting
#6 MMT and the magical profit disappearance
#7 For details of the big picture see cross-references Refutation of I=S
#8 MMT: Redistribution as wellness program

***
REPLY to Kaivey on Nov 13

You say: “Our government is run by the oligarchy and we need a more democratic government accountable to the people.”

This, obviously, is a political analysis/conclusion. And, clearly, it has to be dealt with in the political realm. Economists, though, seem never to have fully realized that there is, for very good reasons, a strict separation of politics and science.

Since the founding fathers, economists violate the principle of the separation of science and politics which has been clearly stated by 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.”

The compelling reason for the separation of politics and science is that the two realms are guided by different and incompatible principles. The one question in science is about the truth of a theory, i.e. its material and formal consistency: “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)

The designation MMT = Modern Monetary Theory indicates the allegiance to science. The problem is that MMT is nothing but crappy proto-science. This status MMT shares with the rest of economics. Economics is what Feynman famously called a cargo cult science and neither right-wing nor left-wing economic policy guidance ever had sound scientific foundations since the soapbox economists Adam Smith and Karl Marx.

At present, neither Krugman nor Wren-Lewis nor Keen#1 nor Varoufakis nor Mosler nor the rest of political loudspeakers, fake scientists, amateur journalists, bloggers, and blatherers can back up their political agenda pushing with a scientifically acceptable economic theory.#2 In order to become a science, economics has to get rid of ALL these folks.

#1 Debunking Squared and Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn and Keenonomics, aggregate demand/change of debt, and some misleading critique
#2 For details of the big picture see cross-references Political Economics

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REPLY to Calgacus on Nov 14

You say: “New Deal style deficit spending can be and almost always is the option that causes the smallest future additional distributive burden of the 99% towards the 1% - one which is mostly negligible.” and “An important way station in realizing this is understanding the flaw in the idea that surpluses are needed to pay for deficits in some way. In particular the idea that this follows from money being a creditary relationship.”

(i) Public deficit spending increases public debt. The concept of debt includes repayment in period t, otherwise, it is a gift. Now, the repayment can be postponed indefinitely. So, as a LIMITING case t goes to infinity, t → ∞. MMT simply pushes repayment beyond the time horizon where it is conveniently forgotten.

(ii) The limiting case, though, does NOT make the debt disappear. Debt gives rise to interest. And a debt with infinite duration gives rise to an infinite interest burden for the household sector which takes the form of a tax burden.

(iii) Interest payments redistribute income from we = all taxpayers = creditors + non-creditors to creditors.

(iv) In the LIMITING case, the interest rate is zero if the debt is held in the form of overdrafts/deposits at the central bank (with deposits = money). In this limiting case, no redistribution of income takes place.

(v) The two limiting cases taken together make public debt resemble a gift: no repayment, no interest burden.

(vi) What is missing in this picture is that Public Deficit = Private Profit. Profit, though, is not indefinitely held as zero interest deposit at the central bank. Let us assume here that profit is distributed as dividend and that this dividend income is fully spent. The additional consumption expenditures lead to a price hike and a redistribution of period output between wage income receivers (a.k.a. ninety-nine-percenters) and the receivers of dividends (a.k.a. one-percenters). Needless to emphasize that non-distributed profits can alternatively be used to buy all kinds of assets, e.g. other firms.

In sum: Public deficit spending has real distributional effects. Whether these are ‘huge’ or ‘small’ depends on the duration of the debt, the rate of interest, and on profit distribution or how non-distributed profit is used. Compared to taxation, public deficit spending is, in any case, a BAD deal for the ninety-nine-percenters.#1 Apart from the distributional issue, it holds in any case that public deficit spending increases the economic power of the business sector.

MMTers and Post Keynesians and Functional Financers in their utter scientific incompetence simply have no idea how the monetary economy works.#2 The profit and employment theory is provably false since Keynes.#3 The only positive feature of Keynesianism/MMT is that microfounded Orthodoxy is an even greater heap of proto-scientific garbage.

#1 On the saying “We owe the debt to ourselves”
#2 Why Post Keynesianism Is Not Yet a Science
#3 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

***
REPLY to Calgacus on Nov 15

The balances equations MMT is based upon are provably false.#1 By consequence, the whole analytical superstructure of MMT is false. As a matter of principle, there is NO NEED to refute more specific claims of MMT about the nature of money or about operational details of money creation/destruction.

The core of the argument is: the macroeconomic foundations of MMT are false since Keynes. Because of this, all MMT policy recommendations lack sound scientific foundations. And this, in turn, means that MMT is not economics but brainless agenda pushing. On closer inspection, it turns out that MMT claims to push the agenda of the ninety-nine-percenters but in fact — intentionally or unintentionally does not matter — it pushes the agenda of the one-percenters.

So, MMT is refuted as an approach.#2 The lack of consistent axiomatic foundations is, of course, compatible with the fact that SOME claims of MMT are accidentally or commonsensically or trivially true. This does not help much. The flat earth theory contained also statements that were trivially true but this has not saved it from being flushed down the drain.

You say “But what you are doing is like trying to refute or prove a statement of classical Euclidean plane geometry with calculus or differential geometry.” It is pretty obvious that this pseudo-methodological blather is beside the point and an insufficient answer to the PROOF of MMT’s material/formal inconsistency.

So, let us first of all, put the balances equations right. At first, we have only the business- and the household sector.#3 The two sectoral balances are given as follows:
Qm≡C−Yw  profit Qm is household sector’s spending C minus wages Yw,
Sm≡Yw−C   saving Sm is wage income Yw minus consumption expenditures C,
---------------
Qm+Sm=0 or Qm=−Sm.

The business sector’s monetary profit Qm is equal to the household sector’s dissaving. This is the most elementary form of the macroeconomic Profit Law. For a start, the household sector’s budget is balanced, i.e. C=Yw, hence macroeconomic profit is zero.

Transaction money is needed by the business sector to pay the workers who receive the wage income Yw per period. Transaction money is produced (i) either in the form of an IOU by the business sector, or (ii), by the central bank in the form of overdrafts/deposits with deposits = money. The average stock of transaction money is given as M=kYw, with k determined by the payment pattern. In other words, the average stock of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by either the business sector as an IOU or by the central bank in the form of deposits and overdrafts which are always equal. The idealized transaction pattern is shown on Wikimedia.#4


The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank is continually created and destroyed during the period under consideration.

The transaction equation M=kYw=kPX=kPRL tells one that under the condition of budget balancing C=Yw and market clearing X=O the average stock of transaction money doubles if employment L doubles. The economy NEVER runs out of money. Transaction money is a generalized short-term IOU that bears no interest.

Now, the government sector GS is added. The three sectoral balances are given as follows:
Qm≡C+G−Yw  profit Qm is HS and GS spending C+G minus wages Yw,
Sm≡Yw−T−C   saving Sm is wage income Yw minus taxes T and expenditures C,
Bm≡T−G         budget surplus Bm is taxes T minus government expenditures G,
-------------------
Qm+Sm+Bm=0 or Qm=−Sm−Bm.

The business sector’s monetary profit Qm is equal to the household sector’s dissaving plus the government sector’s budget deficit. For a start, taxes T are set to zero. Deficit spending −G is equal to cumulative money creation by the central bank. The household sector’s budget is balanced, i.e. C=Yw, i.e Sm=0. In this case, the business sector’s profit is equal to the government’s deficit, i.e. Qm =−G. It holds Public Deficit = Private Profit.

The combined transaction pattern of the household- and the government sector is shown on Wikimedia.#5



The transaction pattern of the business sector is the exact mirror image. So, while the government sector ends up with overdrafts, the business sector ends up with deposits of equal magnitude.

Two things happen, (i) there is a price hike because aggregate nominal demand is now C+G, and (ii), output O is redistributed between the household and the government sector. There is REAL taxation without nominal taxation because T=0. Nominal taxation is simply shifted into the indefinite future.

The government’s deficit spending causes an increase in the financial assets of the business sector. At first, the financial asset consists of deposits at the central bank which bear zero interest.

In the second step, the public debt is consolidated by the issuance of long-term government bonds or other types of securities. Government securities are offered with a certain maturity and interest rate. In the present case, the business sector is in possession of deposits and decides which amount to buy. It is here assumed for simplicity that the whole government debt is consolidated. After the switch from non-interest-bearing deposits to interest-bearing bonds, the newly created money vanishes again from the central bank’s balance sheet.

So, over the whole cycle, the household sector is taxed in real terms, suffers a reduction of net income for the duration of consolidated government debt via interest payments = taxes, while the business sector makes a profit which is equal to the budget deficit and enjoys interest income for the duration of the consolidated debt.

Compared to immediate taxation T=G, the household sector is worse off with government deficit spending and the business sector is better off. These are the distributional effects of MMT policy. Other effects have been dealt with elsewhere (for employment policy see #6).

Bottom line: MMT is proto-scientific garbage, politically biased in favor of the one-percenters, and sold as beneficial for the ninety-nine percenters.

#1 Rectification of MMT macro accounting
#2 For the point-by-point refutation see cross-references MMT
#3 The production-consumption economy is defined by the macro axiom set: (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 X=O.
#4 Wikimedia, Transaction pattern C=Yw
#5 Wikimedia, Transaction pattern C+G greater than Yw
#6 Full employment through the price mechanism

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REPLY to Calgacus on Nov 16

I said “The balances equations MMT is based upon are provably false. By consequence, the whole analytical superstructure of MMT is false. As a matter of principle, there is NO NEED to refute more specific claims of MMT about the nature of money or about operational details of money creation/destruction.”

You answered: “That is getting things completely backwards. MMTers do not say that ‘MMT is based upon’ some balance equations.”

Fact is that the balances equations constitute the very core of MMT’s self-presentation. #1, #2, #3, #4, #5, #6 Fact is also that the MMT balances equations are mathematically/ provably false.#7

Because of this, ALL MMT policy recommendations lack sound scientific foundations. The economics of Kansas City, Bard, the Virgin Islands, Australia etc is qualitatively below the level of Trump University.

MMT is refuted on all counts and whether Calgacus, Mitchell, Tcherneva, Mosler, Wray, Kelton, Fullwiler, Forstater, Kaboub, Tymoigne and the rest of scientifically incompetent MMTers understand/accept this is a matter of indifference.

#1 Presentation, Pavlina Tcherneva, Sectoral Balances Spain

Source: Google Images

#2 Wikipedia, Modern Monetary Theory
#3 Wikipedia, Sectoral Balances
#4 Billy blog, Flow-of-funds and sectoral balances
#5 For the point-by-point refutation of Peter Cooper’s posts see cross-references MMT
#6 Warren Mosler “Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”
#7 MMT and the magical profit disappearance

November 11, 2017

From false microfoundations to true macrofoundations

Comment on Lars Syll on ‘Big — and not so big — ideas in macroeconomics’

Blog-Reference and Blog-Reference

John Quiggin summarizes his book review: “In Athreya’s world, and that of a large part of the academic macroeconomics profession, macroeconomics does indeed begin with Walras, and the first modern development in the field was the formalization of Walras’ model by the economic theorists Arrow, Debreu and MacKenzie in the 1950s.” and concludes ”Athreya’s version of macro excludes everything in which I am interested.”

Obviously, John Quiggin is a proto-scientific moron of the sort that overpopulates economics. Science takes the form of a theory that has to satisfy the criteria of material and formal consistency. So the only question with regard to orthodox macroeconomics is Is it true or false? and NOT whether it is after John Quiggin’s fancy.

It holds: “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)

Neither orthodox nor heterodox economists have the true theory. Fact is:
  • Economics is a failed science. It consists actually of political and theoretical economics. Political economics is scientifically worthless, and theoretical economics is materially and formally inconsistent.#1
  • The subject matter of economics is the economic system as a whole. Psychology, Sociology, Behaviorism, Political Science, Geopolitics, History, Anthropology, Biology/Darwinism, Institutionalism, Law, Ethics, Philosophy are NOT economics. The valid results of these independent disciplines are taken into economics by way of multidisciplinary cooperation if needed.
  • Economics is NOT about Human Nature/motives/behavior/action. NO way leads from second-guessing individual/social behavior to the understanding of how the economic system works. The microfoundations approach had been doomed to failure from the very beginning.
  • Partial analysis is of extremely limited value and invariably runs into the Fallacy of Composition.
  • The indispensable paradigm shift consists in replacing microfoundations by macrofoundations.
  • Keynes messed up the paradigm shift because his macrofoundations lack the correct definition of macroeconomic profit.#2
  • This is the core of the correct macrofoundations: (A0) The objectively given and most elementary systemic 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.
These premises are certain, true, and primary, and therefore satisfy all methodological requirements. All variables are measurable in principle. The set of premises is minimalistic, that is, Occam’s Razor has been applied and the set cannot be reduced further, only expanded. The set contains no nonentities like constrained maximization or equilibrium and no normative assertions.

Methodologically it holds: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 Microfoundations are given with these verbalized 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) Every economic model that applies just one of these axioms is false.
#2 How Keynes got macro wrong and Allais got it right

November 10, 2017

Dani Rodrik, fake scientist

Comment on Dani Rodrik/Boston Review on ‘Rescuing Economics from Neoliberalism’

Blog-Reference

Every layperson who is confronted with the statement: Mr. A has been murdered and you are the murderer, understands immediately the concept of scientific truth. Truth is (i) a binary concept, i.e. there is only true/false with NOTHING in between, and (ii), truth is objective, that is provable in principle, and (iii), that it is worth every effort to find out the truth even if we cannot be absolutely sure that we will be successful. As Popper put it “Although nowadays we have given up the idea of absolutely certain knowledge, we have not by any means given up the idea of the search for truth.”

Admitting that there is no absolute certain knowledge is perfectly compatible with the assertion that the Law of the Lever represents certain knowledge. In fact, science is defined as the body of certain knowledge. Scientific truth has two inseparable methodological components: material and formal consistency. This, of, course, holds also for economics: “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)

Economists do not have the true theory. Economics is not a science but what Feynman called a cargo cult science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/ formally inconsistent, and all got profit ― the pivotal concept of the subject matter ― wrong. With the pluralism of provably false theories economics sits squarely at the proto-scientific level.

So, since Adam Smith/Karl Marx, economic policy guidance NEVER had sound scientific foundations. Economics is one of the most embarrassing scientific failures of all time and the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is either an absurd self-delusion or a deliberate deception of the general public.

While genuine scientists have no problem with the idea of certain knowledge, fake scientists desperately try to keep things in the morass between true and false where ‘nothing is clear and everything is possible’ (Keynes). Vagueness, vacuous wish-wash, and inconclusiveness are components of the survival strategy of incompetent scientists because “… you cannot prove a vague theory wrong.” (Feynman)

Accordingly, Dani Rodrik’s supreme methodological rule is “Good economists know that the correct answer to any question in economics is: it depends.” Genuine scientists know that this is NO answer at all but the evasive blather of fake scientists. Popper called this an immunizing stratagem and condemned it as a violation of the foundational principle of science.

Dani Rodrik, of course, maintains that evasion has some merits: “As even its harshest critics concede, neoliberalism is hard to pin down.” Yes, this exactly is the difference between the political agenda pusher and the scientist. The former subscribes methodologically to anything-goes the latter to provable material/formal consistency. Anything-goes is not only “hard to pin down” it is impossible to pin down and this makes it so dear to cargo cult scientists.

Dani Rodrik has not realized that economics is scientifically as dead as the flat earth theory. He defends the indefensible and tries to save economics by a spectacular operation, that is, by amputating the excrescence of neoliberalism from the healthy body of economic science: “A proper understanding of the economics that lies behind neoliberalism would allow us to identify ― and to reject ― ideology when it masquerades as economic science.”

This leads directly to the core question: “Are there universal truths in economics?”

Here is Dani Rodrik’s list of the universal principles that underlay economics: “efficiency, incentives, property rights, sound money, fiscal prudence.” These principles “… presume a capitalist economy ― one in which investment decisions are made by private individuals and firms ― but not much beyond that. They admit ― indeed they require ― a surprising variety of institutional arrangements.” This, in a nutshell, is what Dani Rodrik offers as the scientific truth economists have worked out in the last 200+ years.

Where economists fail, Dani Rodrik concedes, is at practical application: “Perhaps maps offer the best analogy. Just like economic models, maps are highly stylized representations of reality. … Economists tend to be very good at making maps, but not good enough at choosing the one most suited to the task at hand.”

Fact is that the representative economist in his utter scientific incompetence has not realized until this day that his maps = models are utter scientific garbage beginning with supply-demand-equilibrium and ending with DSGE respectively Post Keynesianism. More specifically:
  • economics is axiomatically false, that is, Walrasian microfoundations and Keynesian macrofoundations are materially/formally inconsistent,
  • because the axioms are false the whole analytical superstructure is false,#1
  • economists do until this day not know what profit is,#2
  • economists do not understand how the economic system, i.e. the price and profit mechanism, works,
  • economists fail to realize that the market economy is NOT self-correcting but inherently unstable,#3
  • economists fail to realize that because their economic policy prescriptions lack sound scientific foundations they regularly worsen the situation.#4
Economists are NOT scientists who are clumsy at practical application but political agenda pusher who are absolutely incompetent at science. Dani Rodrik is just another representative in the 200+ years old history of cargo cult science who fails to grasp that economics does not need another brain dead model but a paradigm shift.#5

Egmont Kakarot-Handtke

#1 10 steps to leave cargo cult economics behind for good
#2 The profit theory is false since Adam Smith
#3 The market economy is inherently unstable and economists never grasped it
#4 How economists murdered the economy and got away with it
#5 For details of the big picture see cross-references Failed/Fake scientists


Related 'New Economic Thinking, or, let’s put lipstick on the dead pig' and 'Failed economics: The losers’ long list of lame excuses' and 'Heterodoxy and Pluralism, too, is proto-scientific junk' and 'How economists habitually mess it up' and 'The existence of economic laws and the nonexistence of behavioral laws' and 'The father of modern economics and his imbecile kids' and 'How to make economics a science'.