April 30, 2015

Rubberneck's reality

Comment on Asad Zaman on ‘Gödel’s theorems and the limits of reason’

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In his paper ‘Understanding the problems of mathematical economics: A “continental” perspective’ Wolfgang Drechsler quotes: “...scientific concepts are idealizations; they are derived from experience obtained by refined experimental tools, and are precisely defined through axioms and definitions. Only through these precise definitions is it possible to connect the concepts with a mathematical scheme and to derive mathematically the infinite variety of possible phenomena in this field. But through this process of idealization and precise definition the immediate connection with reality is lost.” (Heisenberg, in 2011, p. 52)

What Drechsler suggests throughout his paper is that in the scientific process reality gets lost. Note, however, that Heisenberg speaks of the immediate reality. This reality is dear to so-called social scientists and consists of what the rubberneck sees when he looks out of the window and hears when he listens to his neighbors and the talking heads.

Atoms and quarks do not belong to this immediate reality. Neither does the economy. Nobody can see, touch, hear or smell the economy. So, nothing of importance is lost through the scientific process but much is gained. It can hardly be denied that Heisenberg and his colleagues reached a higher level of knowledge using the longest mathematical ladder. The same cannot be reported from the adepts of Verstehen. They are forever lost in liguisticality, that is, myth, storytelling, rhetoric, and gossip.

Economics fits Heisenberg's characterization of the scientific process, but only superficially. This has often been noticed.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

As far as Wolfgang Drechsler's and Asad Zaman's critique of mathematics and the scientific method is appropriate it hits the look-alike.*

To apply the method correctly and to state ‘axioms and definitions precisely’ is the task of Constructive Heterodoxy.**

Egmont Kakarot-Handtke


References
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Drechsler, W. (2011). Understanding the Problems of Mathematical Economics: A "Continental" Perspective. real-world economics review, (69): 45–57. URL

*  For detailed correction and refutation of Zaman’s arguments see the cross-references
** For the new curriculum see the cross-references

Essentials of Constructive Heterodoxy: behavior

Working paper at SSRN

Abstract  For a host of compelling methodological reasons, homo oeconomicus has to be replaced. This is consensus, the open question is how this could be accomplished. What is required first is the separation of the formal foundations into a structural and a behavioral part. This paper introduces the propensity function as general formalization of Economic Man/Woman. The propensity function is a compact formal expression of random, semi-random, and deterministic behavioral assumptions. It is shown how, in a random environment, target-oriented behavior produces stochastic stability and optimality in the product market. With homo oeconomicus the conception of simultaneous equilibrium, too, vanishes.

For the complete set of foundational equations — structural axioms and behavioral propensity function — see here

Essentials of Constructive Heterodoxy: institutions

Working paper at SSRN

Abstract  What do economists understand about the economy if they do not understand the profit phenomenon? Next to nothing. Therefore, the first task in theoretical economics is to clarify the difference between profit and wage income and their respective determinants. It was Ricardo who tackled the problem first, but neither Orthodoxy nor Heterodoxy solved it until this day. The need for a paradigm shift is indisputable. The structural axiomatic approach is more comprehensive as it embraces the consistent interaction of real and nominal variables of the monetary economy and the economic consequences of alternative variants of institutions, e.g. land ownership.

For the complete set of foundational equations — structural axioms and behavioral propensity function — see here

April 29, 2015

The Propensity Function as general formalization of Economic Man/Woman

Working paper at SSRN

Abstract  The present paper demonstrates how the interaction of the structural axiomatic core and the behavioral propensity function produces dynamically stable outcomes in the product market. The propensity function is a compact formal expression of random, semi-random, and deterministic behavioral assumptions. Its two components are direction and magnitude of the rate of change of an elementary axiomatic variable. A type-C propensity function is the formal container for a familiar conception that is known as qualitative prediction. In a random environment, two type-C functions are sufficient to produce stochastic stability and optimality in the product market. The propensity function is truly general.

For the complete set of foundational equations — structural axioms and behavioral propensity function — see here

April 27, 2015

Make no mistake: there can be only one true theory

Comment on ‘Received wisdom in macroeconomics’

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Once upon a time in Vienna, what set Popper's young brain in motion was that he stumbled upon the curious fact that psychoanalysis could explain everything including its own failure. From this he famously derived the basic rule of science that a theory must be refutable in principle. Or, to put it the other way round, a theory that explains everything explains nothing.

We know that economists never understood this methodologically crucial point because they were and still are very proud that they can explain everything — if only with some tweaking after the fact. One of the great methodologists told economists in no uncertain terms that this is always a red hot indicator of scientific dilettantism.

“Everything can be ‘explained’ if we place no restrictions on what we mean by ‘explanation’.” (Blaug, 1994, p. 123)

Wren-Lewis, for one, is entirely unaware of his methodological self-debunking.
“Yet as anyone who is involved in modern macro knows, pretty well whatever X is, there are models that have those things. If you want chapter and verse on this, see Tony Yates. Indeed, one of the characteristics of modern macro, as opposed to the stuff I dimly remember from my youth, is the huge variety of approaches on offer. In that sense, academic macro is flourishing.” (See thread intro)

Yes, but only in that senseless sense. Just imagine you ask a physicist about how the lever works and he answers “Oh, physics is flourishing, there is a huge variety of approaches on offer.”

From the fact that you can construct a model about everything follows only one thing for sure: that you know nothing.

Let us become concrete. Here is the scientific self-test. You apply one of these items
• supply-demand-equilibrium,
• general equilibrium,
• marginal utility,
• well-behaved production functions,
• total income = value of output,
• total income = wages + profits,
• I=S,
• behavioral axioms?
Then your received wisdom is for the birds* and you have nothing of scientific value to offer.

“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)

Egmont Kakarot-Handtke


References
Blaug, M. (1994). Why I am Not a Constructivist. Confessions of an Unrepetant Popperian. In R. E. Backhouse (Ed.), New Directions in Economic Methodology, pages 109–136. London, New York, NY: Routledge.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

* For the correct approach see cross-references here

The synthesis of institution and math

Comment on ‘Wicksell on the use of mathematics in economics’

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Heterodoxy is not merely critical of Orthodoxy but regards it — applying the scientific true/false code — as false. This implies that Heterodoxy is not a corrective that improves Orthodoxy at the margin or an alternative view that can coexist in an anything-goes pluralism but that Heterodoxy replaces Orthodoxy just as helio-centrism has replaced geo-centrism.

This was also the original goal of Institutionalism as formulated by Veblen (1961). Now, when one can safely conclude that Orthodoxy is a failure then, by the same token, one has to admit that not much of real scientific value has come from the Institutionialists.

One reason is that Heterodoxy has always clearly seen the numerous abuses of mathematics (including statistics) in standard economics but has never figured out how to apply it correctly and with good effect to its own cause. As a result, Heterodoxy somehow landed in the Cambridge School of Loose Verbal Reasoning which has Marshall's silly slogan ‘Burn the mathematics’ above its entrance.

This slogan has been updated by the Post Keynesians to "it is better to be roughly right than precisely wrong!" (Davidson, 1984, p. 574)

This slogan sounds plausible in political economics but it is not acceptable in theoretical economics because it amounts to abandoning scientific standards.

For Heterodoxy it is high time to get out of the populist anti-math camp and at long last to accomplish the synthesis of Institutionalism and formalization (see 2015).

"I mean by this that formalization eliminates provincial and inessential features of the way in which a scientific theory has been thought about. ... Formalization is a way of setting off from the forest of implicit assumptions and the surrounding thickness of confusion, the ground that is required for the theory being considered. ... In areas of science where great controversy exists about even the most elementary concepts, the value of such formalization can be substantial." (Suppes, 1968, pp. 654-655)

Heterodoxy either becomes a science or goes down the drain arm in arm with Orthodoxy.

Egmont Kakarot-Handtke


References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Institutions. SSRN Working Paper Series, 2598721: 1–18. URL
Suppes, P. (1968). The Desirability of Formalization in Science. Journal of Philosophy, 65(20): 651–664.
Veblen, T. (1961). The Place of Science in Modern Civilisation, chapter Why is Economics Not an Evolutionary Science?, pages 56–81. New York, NY: Russel and Russel. (1898).

April 26, 2015

Walrasian double-blunder

Comment on ‘On the irrelevance of general equilibrium theory’

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As far as economics is concerned, equilibrium is a nonentity; a metaphor that appeals to animistic thinking, but nothing real corresponds to it. On the other hand, the economy is not a pure random walk either. A better metaphor is therefore that of two drunkards tied together with a string that restricts their movements to a broader path, which, however, has no definitive endpoint or may even evolve toward a cliff.

Because equilibrium is a nonentity all equilibrium models are methodologically unacceptable. This includes Walras's original model.

In addition, this model gets the interdependence between product and labor market wrong.

Davar sums up: “In other words, in equilibrium, if a certain service is not fully employed, then its price is zero. For example, if unemployment exists, then wages should be equal to zero.”

Constructive Heterodoxy proves that, to the contrary, there is a positive feedback loop between wage rate and employment (2015). That is, with a wage rate of zero the economy simply vanishes. The correct employment equation is given here.

If unemployment exists, the wage rate should rise. Yes, rise!

Walras equilibrium model contains at least two fatal errors/mistakes. It is as irrelevant as more recent versions.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

April 23, 2015

The insignificance of Gödel's theorem for economics

Comment on Asad Zaman on ‘Gödel’s theorems and the limits of reason’

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In his Tribune article, Asad Zaman writes: “Progress in science becomes possible only after we abandon the quest for logical certainty.”

True, of course, logic has limits. Yet, from this does not follow that inconsistency is acceptable. From Gödel's theorem, in particular, does not follow that the pluralism of false theories is acceptable. And not by any stretch of the imagination follows that inconsistent orthodox and heterodox economic models will ever be acceptable.

It still holds: science does not explain everything, but non-science explains nothing. Science is not logic alone and not fact alone: it is the seamless synthesis of both.

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

Asad Zaman's understanding of the interaction of mathematics and physics is utterly confused. He writes: “The axiomatic-deductive methodology of mathematics leads to logical certainty without requiring empirical confirmation — we do not assess the validity of the Pythagorean Theorem by drawing triangles and measuring their sides.” (see Tribune)

Exactly the opposite is true.

“One of the most famous stories about Gauss depicts him measuring the angles of the great triangle formed by the mountain peaks of Hohenhagen, Inselberg, and Brocken for evidence that the geometry of space is non-Euclidean.” (Brown, 2011, p. 565)

Or, with regard to Newton's axiomatization of physics: “In the most fruitful applications of mathematics to the physical world, some nonmathematical axioms also enter. The Newtonian system of mathematical mechanics depends as much on the Newtonian laws of motion and gravitation as it does on the axioms of mathematics.” (Kline, 1981, p. 469)

In pure mathematics, progress has not been and will not be achieved by abandoning the quest for logical certainty.

“In hindsight, the basic idea at the heart of the incompleteness theorem is rather simple. Gödel essentially constructed a formula that claims that it is unprovable in a given formal system. ... Thus there will always be at least one true but unprovable statement.” (Wikipedia)

This, though, is no hindrance at all for the advancement of economics because a ‘true but unprovable’ statement can be added as an additional axiom to the initially given formal system and thus make it more comprehensive. More comprehensive, to be precise, does not mean complete. Not complete, on the other hand, does not mean, that non-scientific approaches provide better results or any acceptable results at all.

The fundamental methodological problem of economics does not arise from Gödel's theorem but from the sad fact that economists fail already at simple logical tasks. It can be shown, for example, that the basic Keynesian formalism is logically defective (2011). Nonetheless, economists blindly apply it for more than 70 years.* This scientific incompetence, and not the Incompleteness Theorem, is the real problem of economics.

The manifest confusion of economists and the proto-scientific mess of contradictory and logically defective models cannot be justified with Gödel's theorem.

Egmont Kakarot-Handtke


References
Brown, K. (2011). Reflections on Relativity. Raleigh, NC: Lulu.com.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Kline, M. (1981). Mathematics and the Physical World. New York, NY: Dover.

*See also here

April 22, 2015

When Ricardo saw profit, he called it rent: on the vice of parochial realism

Working paper at SSRN


Abstract  According to Ricardo the principal problem in Political Economy is to determine the laws which regulate the distribution of profits, rents, and wages. Ricardo determined the respective shares in real terms and to this end invented an engine of analysis that became paradigmatic. The present paper applies a consistent real and monetary analysis, which is based on a set of objective structural axioms, and contrasts the results with Ricardo's approach. The general result is that real analysis misses economic reality. The specific result is that rent is a misnomer for the distributed profit of the land owning firm.

April 21, 2015

The emergence of profit and interest in the monetary circuit

Working paper at SSRN

Abstract  Efficient progress of the monetary theory of production (MTP) is hampered by an unsatisfactory account of how profit and interest emerge in the monetary circuit. As matter of fact, this question puzzled already the classics. It seems evident that it cannot be answered by applying the usual tools. The present paper's purpose is to overcome the deadlock. This is done by setting the circulation approach on general structural axiomatic foundations.

April 20, 2015

Economists kill the economy

Comment on ‘Reality killed the Washington Consensus’

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Francesco Saraceno writes about failed Orthodoxy: “These results are not surprising per se. All of these issues are highly controversial, so it is obvious that research does not find unequivocal support for a particular view. All the more so if that view, like the Washington Consensus, is pretty much an ideological construction.” (See thread intro)

The Washington Consensus was built on standard economic theory. It is well known that this theory does not satisfy the scientific criteria of material and formal consistency. Therefore, it is a priori impossible that economists can offer scientifically 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, 1991, p. 30)

For lack of the true theory, economists have only vague and commonsensical ideas about how the actual economy works. So they cannot help politicians to steer the economy. Worse, they usually deteriorate the situation, or, in more practical terms, they bear for example the responsibility for high unemployment (for the correct employment theory see 2015).

The problem is not so much ideology, the root of the malaise is the collective inability to trump up the new economic paradigm.

“... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives ...” (Feyerabend, 2004, p. 72), original emphasis

Egmont Kakarot-Handtke


References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

The structural price mechanism

Working paper at SSRN

Abstract   Standard economics rests on behavioral assumptions that are formally expressed as axioms. With the help of additional assumptions like perfect competition and equilibrium a price vector is established that displays a host of desired properties. This approach is tightly stuck in a cul-de-sac. Conceptual rigor demands to discard the subjective-behavioral axioms and to take objective-structural axioms as the point of departure. The present paper reconstructs the price system in structural axiomatic terms for the most elementary economic configuration. The generalization of the structural price mechanism supplants the collapsed Walrasian and Keynesian attempts to formulate a consistent price and value theory.

April 19, 2015

Stylized facts and vacuous interpretations

Comment on ‘The IMF on Investment since 2008’

Blog-Reference

Obviously your post lacks an underlying coherent theory. To make a long argument (2015) short, the correct employment equation for the investment economy is given here.

The equation says that employment L increases with
• investment expenditures I,
• an increasing expenditure ratio rhoE (=C/Y),
• an increasing factor cost ratio rhoF (=W/PR),
under the condition of product market clearing if price P and productivity R in the consumption and investment good industry as well as distributed profit Yd remain unaltered in the period under consideration; it decreases in the opposite case. The testable equation explains unemployment.

The income distribution affects the expenditure ratio rhoE. The dependency of the average expenditure ratio from wage income and distributed profit and their different expenditure ratios is given with eq. (30) in (2014).

The employment equation above accounts coherently for both the effects of investment expenditures and distributional changes (and a bit more).

It is important to note that distribution theory crucially depends on profit theory. It is very probable that your profit theory is false (again see 2014) and therefore your interpretation of the IMF data is pointless.

Egmont Kakarot-Handtke

References
Kakarot-Handtke, E. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL

Economics vs. Sociology

Comment on ‘On dogmatism in economics’

Blog-Reference

You say: “... economics is a class ideology, not science.” This is certainly true for political economics but not for theoretical economics. The goal of theoretical economics is to explain how the economy works.

The crucial difference is this:
“A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)

That thinking is normally determined by self-interest is not such a new insight. As a matter of fact, any thinking about society ends with some inner necessity at a conspiracy hypothesis (= all bad things are ultimately caused by an unknown but powerful entity. The Invisible Hand is only a variant of this kind of ‘explanation.’)

The crucial point is that economics deals not at all with society. This is the realm of sociology, psychology, anthropology, history, etcetera. Insofar as economics deals with behavioral assumptions like utility maximization, greed, power grabbing, etcetera, it is a dilettantish variant of Psycho-Sociology.

Theoretical economics deals exclusively with the systemic behavior of the actual monetary economy.

Most economists have never understood their real task: they are doing PsySoc not economics. Hence, they are out of science before they even start to think.

Theoretical economics is objective. There are systemic laws but no behavioral laws. Systemic laws have the same methodological status as physical laws. The economist's task is to find these laws and not to waffle about human behavior and society.

Egmont Kakarot-Handtke


References
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism.
Skeptical Inquirer, 21(6): 1–7. URL

See also the preceding post

Say's Law: a rigorous restatement

Working paper at SSRN

Abstract  Say's Law has passed through various conceptual frameworks. As the next logical step, this paper provides a rigorous restatement in structural axiomatic terms. The main reason is that previous attempts have been methodologically unsatisfactory. Standard economics rests on behavioral assumptions that are expressed as axioms. Axioms are indispensable to build up a theory that epitomizes formal and material consistency. The fatal flaw of the standard approach is that human behavior does not lend itself to axiomatization. Small wonder that the accustomed attempt to explain how the economy works met with scant success. This battered also the discussion about Say's Law.

April 18, 2015

The Law of Supply and Demand: here it is finally

Working paper at SSRN

Abstract  There is no such thing as a law of human or social behavior. The conceptual consequence of this paper is to discard the subjective-behavioral axioms and to take objective-structural axioms as formal foundations. The central piece of economic theory is the interaction of supply and demand which determines prices and quantities. Supply and demand in turn are assumed to be determined by subjective factors. In the structural axiomatic paradigm the Law of Supply and Demand follows solely from objective factors. The Law consists of measurable variables and is testable in principle. The results prove the superiority of the new paradigm.

Unfit in all dimensions

Comment on ‘Models, math and macro’

Blog-Reference

Schumpeter remarked some time ago: “We are not yet out of the wood; in fact, we are not yet in it.” (1994, p. 7)

Schumpeter understood well what science is and saw clearly that, in his time, economics was still at the proto-scientific stage or — at best — that it had made it to the threshold of science.

“The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (1994, p. 9)

Are we much more advanced nowadays with DSGE models? Can economists explain better how the actual economy works? Not really.

“The last thirty years seem to this observer to have been downhill almost all the way. So much of the literature ... I see as silly beyond all expectation and unscholarly beyond all endurance.” (Leijonhufvud, 1998, p. 234), see also (Quiggin, 2010)

True, many economists are prepared to admit that what passes as economics is probably false and certainly insufficient but ...
“Critics of DSGE are however dismissed because — in a nutshell — there’s nothing better out there.” (See intro)

This, indeed, is the traditional last line of defense.
“There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)

In plain words this says: until some superior economics comes along we are doing the accustomed inferior economics. This is not what real scientists do.

“There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao and Israel, 1990, p. 362)

After more than 200 years it is pretty obvious that economists are unfit for science. Of course, there are different degrees of unfitness between the student who naively accepts the pivotal blunder of supply-demand-equilibrium and the heterodox economist who is clueless about what a superior alternative to current Orthodoxy looks like.

The ultimate proof of unfitness, though, is that neither orthodox nor heterodox economists can tell until this day the difference between income and profit (2014). Without a demonstrably correct profit equation, what are the chances that any macro model could be enlightening or of practical use? What do you understand about the economy if you do not understand the profit phenomenon?

Egmont Kakarot-Handtke


References
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Leijonhufvud, A. (1998). Discussion: Involuntary Unemployment One More Time. In R. E. Backhouse, D. M. Hausman, U. Mäki, and A. Salanti (Eds.),
Economics and Methodology. Crossing Boundaries., pages 225–235. Houndmills, Basingstoke, London: Palgrave.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

April 17, 2015

Mortifying scientific headstands

Comment on ‘The Coase Theorem’

Blog-Reference

It is — first and foremost — important to distinguish between political and theoretical economics. In political economics anything goes, in theoretical economics scientific standards are observed.

General equilibrium theory is out of science for several compelling reasons. The first inexcusable methodological blunder is this:
“... you shouldn't find the fixed equilibria first and then see if an economy converges to it; rather, the convergence process will itself constitute the equilibrium, if any exist.” (Mirowski, 1989, p. 459)

It is simply inadmissible to put assumptions like equilibrium, decreasing returns, perfect competition, etcetera into the premises. This mistake/error is known since antiquity as petitio principii and J. S. Mill, the founder of economic methodology, dealt with it at length in his System of Logic.

Political economics in general and equilibrium economics in particular is scientifically worthless. The fact that neither the representative economist nor the Law and Economics movement have realized this until this day is self-disqualifying.

The corollary of the methodological headstand is the abuse of mathematics. Alejandro Nadal correctly observes:
“In its development, economics as a discipline has been obsessed with the use of mathematical models to build a theory of competitive markets. The only function for the very awkward assumptions … was to allow the theoretician to have access to certain mathematical theorems.” (See intro)

This abuse is not corrected with Marshall's silly prescript ‘Burn the mathematics.’ Again, it is theory that has at first put on its feet.

“The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein, quoted in Schmiechen, 2009, p. 368)

To make a long methodological story short: the fatal defect of Orthodoxy is that all its theorems are derived from behavioral axioms. Yet, no specific behavioral assumption whatever can serve as a starting point for economic analysis. From this follows for New Economic Thinking that the behavioral axioms have to be replaced (2014). To flip from headstand to footstand is called in science a paradigm shift.*

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Mirowski, P. (1989). The Rise and Fall of the Concept of Equilibrium in Economic Analysis. Louvain Economic Review, 55(4): 447–468. URL
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited, volume 1. Norderstedt: Books on Demand, 2nd edition. URL

* For cross-references see here

Essentials of Constructive Heterodoxy: money, credit, interest

Working paper at SSRN

Abstract  The goal of theoretical economics is to explain how the monetary economy works. The fatal methodological defect of Orthodoxy is that it is based on behavioral axioms. Yet, no specific behavioral assumption whatever can serve as a starting point for economic analysis. From this follows for Constructive Heterodoxy that the subjective axiomatic foundations have to be replaced. This amounts to a paradigm shift. Nobody can rest content with a pluralism of false theories. Based on a set of objective axioms all economic conceptions have to be reconstructed from scratch. In the following this is done for the theory of money.

For cross-references see here

April 16, 2015

Science or Circus Maximus?

Comment on ‘Economists — arrogant and self-congratulatory autists’

Blog-Reference

Moisés Naím refers to an article of his in The Atlantic: “Ten years ago, a survey published in the Journal of Economic Perspectives found that 77 percent of the doctoral candidates in the leading American economics programs agreed or strongly agreed with the statement ‘economics is the most scientific of the social sciences’.” (See intro)

He sums up “economists would be well advised to trade in their intellectual haughtiness for a more humble disposition.”

This ad hominem argument is, of course, characteristic of base level yellow press gossip. Most people have ego problems and arrogance is the key word to pique their wrath.

From the question of the scientific status of economics Moisés Naím lands after a few paragraphs in the Circus Maximus of cheap emotions, ridiculous moralizing, and sham debate.

Let us put things straight.

The first thing to notice is that there is an illegitimate suggestion in this initial statement of the survey ‘economics is the most scientific of the social sciences.'

It has been noted repeatedly by real scientists that, to begin with, the term social sciences is a misnomer. Feynman, for one, characterized them as follows.

“I think the educational and psychological studies I mentioned are examples of what I would like to call cargo cult science. ... They're doing everything right. The form is perfect. It looks exactly the way it looked before. 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, ...” See here or Wikipedia.

Some economists are well aware of the fact that this applies perfectly to economics.

“Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

So, for a meaningful survey the suggestive initial statement has first to be translated into ‘‘economics is the most cultic of the cargo cult sciences.” The approval rating then should be close to 100 percent.

The fact of the matter is that the representative economist cannot even tell the difference between income and profit (2015). Therefore, it is not at all exigent that economists become humble but that they learn elementary logic in their programs and at long last get out of the proto-scientific Circus Maximus.

Egmont Kakarot-Handtke


References
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL

April 15, 2015

Methodology — Marx, too, messed it up

Comment on ‘On dogmatism in economics’

Blog-Reference

Lars Syll writes: “Abstraction is the most valuable ladder of any science. In the social sciences, as Marx forcefully argued, it is all the more indispensable since there ‘the force of abstraction’ must compensate for the impossibility of using microscopes or chemical reactions.” (See intro)

Marx, of course, was perfectly right, albeit only in the abstract. In the practical art of abstraction he messed things up like his classical predecessors since Adam Smith.

The most embarrassing fact of political economics is that neither the pro-capitalists (2014b) nor the anti-capitalists (2014a) ever came to grips with profit (Desai, 2008). This is really mind boggling. Non-economists take notice: more than 200 years full of sound and fury — signifying nothing.

The good news is that Constructive Heterodoxy finally got the fundamental abstraction right. For the correct profit theory see (2015).

By the way, Marx was only echoing J. S. Mill:
“Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’." (Mill, 1874, V.55)

No dogmatism here! Mill had a profound understanding of economic methodology. In this he was far ahead of those who nowadays busily but unknowingly twitter and blog about the economy.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Profit. SSRN Working Paper Series, 2575110: 1–18. URL

See alternatively at RWER

Why Post Keynesianism is not yet a science

Working Paper at SSRN

Abstract  In a programmatic article Alfred Eichner explained, from a Post Keynesian perspective, why neoclassical economics is not yet a science. This was some time ago and one would expect that Post Keynesianism, with a heightened awareness of scientific standards, has done much better than alternative approaches in the meantime. There is wide agreement that this is not the case. Explanations, though, differ widely. The present — strictly formal — inquiry identifies an elementary logical flaw. This strengthens the argument that the Post Keynesian motto ‘it is better to be roughly right than precisely wrong!’ is methodologically indefensible.

April 14, 2015

Reduced-form bricolage and sticky brains

Comment on ‘Sticky Prices, Financial Frictions, and the Ben Bernanke Puzzle’

Blog-Reference

Stephen Williamson cannot explain how the monetary economy works, instead he tells us how economists work.

“For convenience, NK models — which at heart are well-articulated general equilibrium models — are sometimes (if not typically) subjected to linear approximation, and reduced to two equations. One is an "IS curve," which is basically a linearized Euler equation that prices a nominal government bond, and the other is a "NK Phillips curve" which summarizes the pricing decisions of firms. ... The basic idea is that this reduced form model is fully grounded in the optimizing, forwardlooking behavior of consumers and firms, and so conforms to how modern macroeconomists typically do things (for good reasons of course).” (See thread intro)

Unfortunately the basic idea is wrong and there is actually not one methodologically sound reason for how modern macroeconomists typically do things. No doubt about it, modern macroeconomists are irrecoverably lost in the proto-scientific wood (2014b; 2014a).

There are two kinds of macroeconomics: true or false. Clearly, NK-RBC-NC falls squarely into the second class. As a matter of principle, all well-articulated general equilibrium models are false. Hence it is pointless to discuss their irrelevant differences.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

The intelligent student's predicament

Comment on ‘Is there anything worth keeping in standard microeconomics?’

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The student of economics either understands in his first course of Econ 101 that neoclassical economics is unrealistic, irrelevant, absurd, consumptive of time, senseless, dilettantish, logically defective, methodologically unacceptable, useless, etcetera etcetera, or he self-selects out of science.

By default, all heterodox economists are one decisive step ahead of orthodox economists, albeit in widely different ways. The French anti-autistic students were in any case more intelligent and consequent than their peers in other parts of the world. But they did not go far enough because after rigorous debunking you face the real problem.

“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, 1998, p. 703)

Clearly, at the moment there is no convincing new heterodox approach and because of this the professors cannot do anything other than to fall back on neoclassics-plus-1000-caveats or pluralistic wish-wash.

There is only one way forward and this is called in science a paradigm shift. This is the task of Constructive Heterodoxy.*

Indeed, there is absolutely nothing worth keeping of standard microeconomics. Economics is a failed science. From this, Joan Robinson already drew the correct conclusion: Scrap the lot and start again!

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University
Press, 5th edition.

* For the new curriculum see here

April 12, 2015

Methodology as Force Majeure

Comment on ‘Do not underestimate the power of microfoundations’

Blog-Reference

Wren-Lewis writes: “First, economists are usually not comfortable talking about methodology.” (See thread intro)

As a matter of fact, there is not much to talk. All that is necessary to know about methodology is this. “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Now, everybody who looks at economics can convince himself that over more than 200 years economists have failed to produce a formally and materially consistent theory.

Worse, economists do not even understand that science always has to satisfy two criteria. What are they told instead?

“So, for example, you will be told that internal consistency is clearly an essential feature of any model, even if it is achieved by abandoning external consistency. You will hear how the Lucas critique proved that any non-microfounded model is inadequate for doing policy analysis, rather than it simply being one aspect of a complex trade-off between internal and external consistency.” (See intro)

Methodology says there is no trade-off. You always have to deliver both.

Wren-Lewis writes: “In essence, many macroeconomists today are blind to the fact that adopting microfoundations is a methodological choice, rather than simply a means of correcting the errors of the past.” (See intro)

True, but unfortunately economists have made the wrong choice. They second-guess the behavior of agents and do not come to grips with the behavior of the economy. This is the consequence of the self-imposed imperative that all explanations must run in terms of the actions and reactions of individuals (Arrow, 1994, p. 1).

The decisive point is that no way leads from the understanding of the actions and interactions of individuals to the understanding of the working of the economy as a whole. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the invisible hand.

Methodology demands a paradigm shift which consists in abandoning the obsolete subjective-behavioral axioms of standard economics and in adopting objective-structural axioms (2014).

Until now, the majority of economists has been unfit for a paradigm shift and this neatly explains why proto-scientific NK, NC, and RBC modeling is still around. This has nothing to do with explanatory power but much with intellectual inertia.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

Bygones are bygones

Comment on ‘On the irrelevance of general equilibrium theory’

Blog-Reference

The student of economics either understands in his first course of Econ 101 that neoclassical economics is unrealistic, irrelevant, absurd, consumptive of time, senseless, dilettantish, logically defective, methodologically unacceptable, useless, etcetera etcetera, or he self-selects out of science.

When we take this mass phenomenon of adverse self-selection simply as a fact what follows? Telling people who cannot see this for themselves that equilibrium is a nonentity and that general equilibrium is zombie economics (Quiggin, 2010) is Sisyphean.

The alternative is to focus on developing the correct theory of market interaction and to fully replace the unacceptable supply-demand-equilibrium gadget (see 2015).

General equilibrium is gone. It is against the economic principle to spend more than these four words on it.*

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.

* See also here and here

April 11, 2015

Angels-on-a-pinpoint scholasticism

Comment on ‘The Bernanke-Summers imbroglio’

Blog-Reference

What is science?
“Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Everybody who looks at economics can convince himself that over more than 200 years economists have failed to produce a formally and materially consistent theory.

Currently, neither orthodox nor heterodox economists understand how the economy works. Worst of all, they cannot even tell the difference between income and profit. This, of course, is the very condition for a any meaningful discussion about any economic problem. What we have instead is a lively debate about nonentities like equilibrium or utility or rational expectation.

Scientifically, economics is in the Dark Ages and the Bernanke-Summers imbroglio is just another case of vacuous scholasticism.

Constructive Heterodoxy gets out of the intellectual Circus Maximus and comes to grips with the real world.

The correct relationship between profit, saving, investment and distributed profit is given with this formula.

The formula says that there is no such thing as an identity or equality or equilibrium of saving and investment, that is, the loanable funds story and all variants of IS-LM are untenable (for details see 2014).

The correct relationship between employment, saving and investment is given with this formula.

This testable formula explains secular stagnation (for details, including the monetary / financial side, see 2015a; 2015b).

It is not too late for Bernanke and Summers to become scientists.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

April 10, 2015

MIT dilettantes II

Comment on ‘Bernanke-Summers Debate II: Savings glut, investment shortfall, or Monty Python?’

Blog-Reference

Steve Keen is right and there is almost universal consensus: MIT economics is — let there be no ambiguity — scientific crap (2014). The decisive question is where to proceed from this consensus. To repeat ad nauseam that Orthodoxy is a failure is not sufficient.

“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, 1998, p. 703)

Let Bernanke, Summers and the rest of beaten Orthodoxy twitter, leave MIT economics behind, proceed with the paradigm shift.

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

No difference

Comment on ‘What’s the difference between heterodox and orthodox economics?’

Blog-Reference

First of all one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.

It is important to clearly understand that political economics is not and never can be part of science.

A look a Lavoie's table shows that in the column Presupposition the item Political core appears. This shows that Lavoie has not grasped what science is all about. Solely the first four items of the table belong to the realm of science.

With regard to the political dimension the difference between Orthodoxy and Heterodoxy consists in different agendas. With regard to the scientific dimension there is no difference, both approaches are out of science.

Currently, neither orthodox nor heterodox economists understand how the economy works. Marc Lavoie is right: economics needs a paradigm shift. To provide the new foundations of economics is the task of Constructive Heterodoxy.*

By the way, the difference between agenda pushing and science is known since J. S. Mill.
“A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)

Egmont Kakarot-Handtke


References
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.

* for cross-references see here

April 8, 2015

MIT dilettantes

Comment on Steve Keen on ‘The inbred Bernanke-Summers debate on secular stagnation’

Blog-Reference

Steve Keen correctly observed: “So the textbooks are wrong.” (2011, p. 19)

The mess started with Samuelson's textbook of 1948. The pivotal point is that Samuelson's profit theory is logically defective and this invalidates the greater part of the theoretical superstructure.

Here is the smoking gun:
“GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP.” (Samuelson and Nordhaus, 1998, p. 392)

This quote is paradigmatic for the flimsy logic and the loose verbal reasoning that is endemic in economics. The fundamental mistake/error lies in the premise that total income is equal to the value of output (2012, Sec. 1.6).

The scientific incompetence of the MIT crowd does not consist in sharing the same approach but in sharing the same logical defect since more than 50 years.

The sad fact of the matter is that not only MIT cannot tell the difference between income and profit but critical Heterodoxy also. Steve Keen and others of the heterodox camp still think that total income is the sum of wages and profits (2013).

The final debunking of MIT economics from Samuelson to Summers consists in the rigorous proof that their profit theory is false (2014).

The scientific embarrassment of both Orthodoxy and Heterodoxy is that the representative economist fails to capture the essence of the market economy. The idea that economists understand how the economy works and therefore can help to steer it is ludicrous. What we have at the moment is the pluralistic inbreeding of demonstrably false theories.

Egmont Kakarot-Handtke


References
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). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, MA, Burr Ridge, IL, etc.: Irwin, McGraw-Hill, 16th edition.

The common error of common sense: an essential rectification of the accounting approach

Working paper at SSRN

Abstract  The present paper takes the explanatory superiority of the integrated monetary approach for granted. It will be demonstrated that the accounting approach could do even better provided it frees itself from theoretically ill-founded notions like GDP and other artifacts of the equilibrium approach. National accounting as such does not provide a model of the economy but is the numerical reflex of the underlying theory. It is this theory that will be scrutinized, rectified and ultimately replaced in the following. The formal point of reference is ‘the integrated approach to credit, money, income, production and wealth’ of Godley and Lavoie.

Lazy or stupid or both?

Comment on ‘Modern macroeconomics — an intellectually lazy ideology’

Blog-Reference

Diane Coyle writes:
“I think an honest conventionally-trained economist has to at least acknowledge that we grew intellectually lazy about this [the assumption of rational choice].” (See intro)

This statement implies that the representative economist is capable of thinking but only too lazy to apply his full capacities. An alternative explanation for the manifest scientific failure of economists could be that they are substandard thinkers.

Students in any scientific discipline are expected to find out whether their teacher's theory is true or false or incomplete. Growth of knowledge is what science is all about. Hence, the acceptance of basic tenets of conventional economics is strongly indicative of a lack of scientific acumen. From a student who has accepted utility maximization, rational choice, or supply-demand-equilibrium as an explanation no contribution to real scientific progress is to be expected.

At the moment economics is the mindless perpetuation of proto-scientific stuff. An honest conventionally-trained economist has to at least ask himself how it could happen that he and other seemingly intelligent persons could ever accept the green cheese assumptionism and the logical defects of Econ 101.

The wonder of economics is the large number of generations of well-trained students that have faithfully recycled intellectual junk.

In the final analysis it is not a question of honesty but of scientific intuition to realize that the present state of economics calls for a paradigm shift* and not for another ridiculous discussion about efficient markets.

Egmont Kakarot-Handtke


* for cross-references see here

April 2, 2015

Economics for economists

Working paper at SSRN

Abstract  The characteristic capability of science — to turn whatever it might touch into knowledge — seems to have eluded economics. Currently, economists do not understand how the economy works. To get out of the cul-de-sac requires a paradigm shift. It consists in replacing behavioral axioms by structural axioms. The subject matter of theoretical economics is not human behavior but systemic behavior. From the structural analysis follows a new Law of Supply and Demand and a new Profit Law for the economy as a whole. The conventional supply-demand-equilibrium approach is refuted. This implies that the reliance on the spontaneous order metaphor is unfounded.