September 30, 2015

How Orthodoxy buffaloed Heterodoxy

Comment on ‘Deductivism — the original sin of ‘modern’ economics’

Blog-Reference

“The tension between deductive and inductive modes of scientific inquiry is at least as old as written history.” (Clower and Howitt, 1997, p. 21)

In economics this tension has often been misinterpreted as alternative. “Is it better to start deductively from axioms or inductively from facts? When the time comes to choose between internal consistency and consistency with observations, which side should we take?” (Blinder, 1987, p. 135)

Wrong question! There is nothing to choose! Science is defined by both material and formal consistency. It was already clear to Bacon that science moves forward on two legs, that is, by the alternating interaction of facts and axioms.

“There remains simple experience; which, if taken as it comes, is called accident, if sought for, experiment. The true method of experience first lights the candle [hypothesis], and then by means of the candle shows the way [arranges and delimits the experiment]; commencing as it does with experience duly ordered and digested, not bungling or erratic, and from it deducing axioms [theories], and from established axioms again new experiments.” (Novum Organum, 1620; quoted in Wikipedia)

For economics, Schumpeter has settled the question: “... there is not and cannot be any fundamental opposition between ‘theory’ and ‘fact finding,’ let alone between deduction and induction.” (1994, p. 45)

Why, then, is there still a discussion between Orthodoxy and Heterodoxy about deduction and induction? Because both have not really got the point.

Orthodoxy explicitly lays down its premises: “As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: 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.
By definition, the hard-core propositions are taken to be true and irrefutable by those who adhere to the program. ‘Taken to be true’ means that the hard-core functions like axioms for a geometry, maintained for the duration of study of that geometry.” (Weintraub, 1985, p. 147)

Where does the fundamental error/mistake of Orthodoxy come in? Quite simple: HC2, HC4, and HC5 are inadmissible as axioms.

Where does the error/mistake of Heterodoxy come in? Quite simple: instead of replacing the defect orthodox axioms by correct heterodox axioms Heterodoxy argues against the axiomatic-deductive method as such.

By giving the silly behavioral assumption of constrained optimization the status of an axiom Orthodoxy triggered in Heterodoxy the outsized Pavlovian reflex to abhor axiomatization as such. This, unfortunately, amounts to methodological self-mutilation.

The original sin of modern economics is that Orthodoxy got the axiomatic foundations wrong and Heterodoxy has none at all. By no strech of the imagination has economics solved the ‘central problem of depression-prevention’. The manifest failure of economics is not explicable by Deductivism but is the result of pervasive methodological incompetence.

Egmont Kakarot-Handtke


References
Blinder, A. S. (1987). Keynes, Lucas, and Scientific Progress. American Economic Review, 77(2): 130–136. URL
Clower, R. W., and Howitt, P. (1997). Foundations of Economics. In A. d’Autume, and J. Cartelier (Eds.), Is Economics Becoming a Hard Science?, pages 17–34. Cheltenham, Brookfield, VT: Edward Elgar.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

For details on axiomatization in general and the set of structural axioms in particular see the cross-references.

Exponentially growing junk

Comment on Asad Zaman on ‘Capitalism in the 21st Century’

Blog-Reference

You ask: “Why is there so much inequality, and why does it continue to rise? Piketty’s answer is brilliantly simple: r > g. The ‘r’ is the rate of return to wealth. This is the profit that the wealthy can make when they invest. The ‘g’ is the growth rate of the economy, currently around 3.3 per cent, globally.” (See intro)

Did it ever occur to you that this argument has the same logical structure as Malthus's, that is, if population grows faster than food production eventually some people will die of hunger? Likewise, the Club of Rome famously argued, if depletion of a resource runs faster than its natural renewal humanity eventually looks into an empty barrel.

Clearly, the logic of positive/negative growth rates, of which compound interest is only the simplest case, is impeccable. Ultimately, it is a suggestive tautology that explains nothing. This holds also for Piketty’s r > g.

The trivial content of the diverging growth rates argument is that the whole thing ends up either at 0 or 100 percent, depending on whether the net growth rate is negative or positive. This is an easy mathematical exercise and not an economic theory.

For an explanation of growing wealth inequality one first of all needs an understanding of what profit and interest is and how they interact in the monetary economy (2011). The fact of the matter is that neither Orthodoxy nor Heterodoxy has this understanding because the profit theory, and by consequence distribution theory as a whole, is false since Adam Smith (2014b). Piketty is no exception.

Then you ask “A more important question for us to consider ... HOW can we, as heterodox economists — be instrumental in bringing about positive change?”

The answer depends on whether Heterodoxy is defined as political or scientific enterprise. The consequence is pretty obvious: in the first case one has to take political action, in the second case the action consists in the overdue paradigm shift, that is, economic theory has to be reconstructed from the ground up (2014a). Kuhn famously described this as scientific revolution and it is well known since Bacon how the interaction of facts and axioms works.

“There remains simple experience; which, if taken as it comes, is called accident, if sought for, experiment. The true method of experience first lights the candle [hypothesis], and then by means of the candle shows the way [arranges and delimits the experiment]; commencing as it does with experience duly ordered and digested, not bungling or erratic, and from it deducing axioms [theories], and from established axioms again new experiments.” (Novum Organum, 1620; quoted in Wikipedia)

Economists have always mashed up politics and science. The result has been exponentially growing scientific junk. Until this day the representative economist cannot tell the difference between profit and income. Because of this, not much more than confused blather can ever be expected from economists.

So ‘how can economists be instrumental in bringing about positive change?’ What about getting out of economics for good?

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. 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

For details of the big picture see cross-references Incompetence.

September 28, 2015

Nowhere land

Comment on Merijn Knibbe on ‘The return of ‘land’ in macro economic discourse. Wonkish’

Blog-Reference

(i) The misrepresentation of land in economic theory started already with Ricardo's concept of rent (2011b). The deeper problem is that economists never understood what profit is. Therefore, because profit theory has been false from the very beginning, the concept of rent has been misleading, and distribution theory had no foundation whatsoever since the classics (2014). Neoclassics only worsend the situation.

(ii) In order to integrate land into the theory of market interaction the distinction between primary and secondary markets is essential (2011a). Both types run on entirely different principles. The standard supply-demand-equilirium analysis is not applicable to begin with.

(iii) With the distinction between primary and secondary markets comes the distinction between monetary profit and nonmonetary profit. What is also needed is the distinction between monetary and nonmonetary saving. The latter applies in the case of changes of asset values which affect the household sector's net worth directly.

(iv) For the definition of property and the possible use of land for ‘painless’ taxation see (2015).

(v) For the relationship between financing, asset valuation, rate of interest and profit see (2012).

Note in addition:
— The familiar well-behaved production function is a nonentity. Therefore, all models that contain one are worthless. From this follows that neoclassical production and distribution theory has always been unacceptable.
— As far as land/real estate is used as collateral it does not appear on a bank’s balance sheet. Price changes indirectly influence the riskiness of a loan which, however, becomes effective only in the case of default.

In sum: the treatment of land in the history of economic thought is indeed the unassailable proof for the scientific incompetence of economists.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011a). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2011b). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
Kakarot-Handtke, E. (2012). Make a Bubble, Take a Free Lunch, Break a Bank. SSRN Working Paper Series, 2167234: 1–35. URL
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: Institutions. SSRN Working Paper Series, 2598721: 1–18. URL

September 26, 2015

Doomed and damned

Comment on Peter Radford on ‘Beating dead horse?’

Blog-Reference

There is political and theoretical economics and the differences between the two are crystal-clear.
(i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.
(ii) In political economics anything goes; in theoretical economics scientific standards are observed.
(iii) Science is methodologically well-defined by the criteria of material and formal consistency.
(iv) Political economics is a honeypot for morons and accordingly defined by the rules of Circus Maximus.
Almost all of economics is political economics or what Feynman aptly called cargo cult science.*

You argue: “Yes Krugman can be annoying with his emphasis on his version of the Hicks version of Keynes. But if it serves to get a vital message across to a public largely unaware of the internecine struggles within economics, so what?” (See intro)

Annoyance is not exactly a scientific criterion. The real problem is that Krugman’s arguments have no valid theoretical foundation (2014b; 2014a). The difference between a run-of-the-mill journalist and Krugman is that the latter seemingly speaks in the name of science. Because economics is a failed science this is a flagrant abuse of the authority of genuine science which depends since more than 2000 years on rigorous logical and empirical proof. It has never been the task of science to ‘get a vital message across.’

The ethics of science implies the acceptance of logical/empirical falsification. No such thing ever happened in economics.

“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, 1941, pp. 369-370)

“... suppose they [the economists] did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics.” (Hands, 2001, p. 404)

What is the result of manifest scientific incompetence?: “The entire enterprise seems stuck in trenches lobbing diatribe back and forth determinedly with no side going much ground if any at all.” And what is the best thing to do next? “When we are stuck in the trenches we have to keep slogging away. Because to stop is be defeated.” (See intro)

This, in a nutshell, is the perverted methodology of political economics: never accept logical/empirical refutation because it is tantamount to political defeat. And this fully explains the ridiculous performance of economics since more than 200 years.

In political economics it suffices to repeat auto-suggestive mantras: “Austerity is still wrong. Inflation fears are still overblown. And Keynes is still right.” (See intro)

Neither falsification nor annoyance has ever stopped economists from promoting their junk: “It is juvenile to think that we need to stop saying the same things just because the public might get tired of listening.” (See intro)

Who cares that the same things have always been false?

Because of proven scientific incompetence there is no future for Orthodoxy and traditional Heterodoxy. Krugman, Keynes (2011), Radford and all the rest have been refuted. These people are not merely annoying, they are wrong on all counts. What can and must be done is to save science from the doomed and damned dead horse economists. Scientists of the world unite!

Egmont Kakarot-Handtke


References
Hands, D.W. (2001). Reflection without Rules. Economic Methodology and Contemporary
Science Theory. Cambridge, New York, NY, etc: Cambridge University Press.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014a). Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. URL
Kakarot-Handtke, E. (2014b). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL

* For details see Wikipedia

For the big picture see cross-references Proto-science

September 23, 2015

Heterodoxy, too, is scientific junk

Comment on Lars Syll on ‘What went wrong with economics?’

Blog-Reference and Blog-Reference

Science is defined by material and formal consistency. If a theory/model fails on one criterion it is scientifically worthless. With regard to formal consistency, there is no way around “... he who contradicts himself proves nothing” (Klant, 1988, p. 113). But formal consistency alone also proves nothing.

The actual state of economics is this: Orthodoxy has failed on both counts. Therefore, all hopes rest on Heterodoxy. The crucial question is, does Heterodoxy satisfy the indispensable methodological criteria? Let us have a look at profit theory.

The profit theories of Keynes, Kalecki, Minsky, Keen are different (Marx, Mises/Hayek, and others could be added). They cannot all be correct at the same time. As there is only one Law of the Lever, there can be only one objective Profit Law for the economy as a whole. This is not the case.

(i) Keynes: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson and Bezemer, 2010, pp. 12-13, 16)

(ii) “Kalecki derived this relationship in an extremely concise, elegant and intuitive way. He starts by making simplifications which he later progressively eliminates. These assumptions are:
• Divide the whole economy into two groups: workers, who earn only wages and capitalists,    who earns only profits.
• Workers do not save.
• The economy is closed (there is no international trade) and there is no public sector.

With these assumptions Kalecki derives the following accounting identity:

 \textstyle  P+W=C_W+C_P+I  \,\

where P is the volume of gross profits (profits plus depreciation), W is the volume of total wages, Cp is capitalists consumption, Cw is workers consumption and I is the gross investment that has been made in the economy. Since we have supposed workers who do not save (that is, to say in the preceding equation), we can simplify the two terms and arrive at:

 \textstyle P=C_P+I

This is the famous profits equation, which says that profits are equal to the sum of investment and capitalist’s consumption.” (Wikipedia: Kalecki, 2015)

(iii) Minsky: “The simple equation 'profit equals investment' is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure.” (2008, p. 161)

(iv) Keen: “Total income = Wages plus Profits” (2011, pp. 366, 146) and “... national income resolves itself into wages and profits” (2010, p. 12).

It is quite obvious that heterodox economists, like their orthodox counterparts, have no idea of what profit is (2014). Hence, they fail to capture the essence of the market economy. Because of this, economists have nothing to offer in the way of a 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)

The true theory satisfies the criteria of material/formal consistency. All that Orthodoxy and Heterodoxy have currently to offer are contradicting opinions; neither came ever to grips with science, with profit and with the working of the economy we happen to live in.

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
Kalecki, M. (2015). The Profit Equation. Wikipedia. URL
Keen, S. (2010). Solving the Paradox of Monetary Profits. Economics E-Journal, 4(2010-31). URL
Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.
Klant, J. J. (1988). The Natural Order. In N. de Marchi (Ed.), The Popperian Legacy in Economics, pages 87–117. Cambridge: Cambridge University Press.
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, NY, Chicago, IL, San Francisco, CA: McGraw Hill, 2nd edition.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

Preceding post 'Economics is an abysmal failure of reason'.

Related 'PsySoc — the scourge of economics' and 'Economics: ‘a tale told by an idiot, full of sound and fury’?'

For details of the bigger picture see cross-references Profit in particular 'Keynesianism as ultimate profit machine' and cross-references Heterodoxy.

E-money

Comment and correction on ‘As Predicted BOE Head Economist and Time 100 Most Influential Suggests E-Dollar Concept’

Blog-Reference

The concept of E-money has been developed in 1986. See the article ‘Geld ist Information: volkswirtschaftliche Aspeke der Bankautomation’, that is, ‘Money is Information: economic aspects of bank automation’. Reference here.

Note:
(i) The persons mentioned in the title are 29 years late.
(ii) I am the copyright holder for the concept of E-money.
(iii) Check reference and correct the post.

Egmont Kakarot-Handtke

***

Comment and more information

I agree with you that the concept of E-money has developed rapidly in the last years and that it has acquired lately a very specific meaning as ‘exchange rate between paper currency and currency held in the bank’.

My article was about the general case of a full replacement of bank money, notes and coins by E-money, with E-money managed by a central bank. By consequence, the question of an exchange rate between the moneys did not arise to begin with. The case of a private issuance of E-money was not considered at all, here Bitcoin deserves the credits. In brief, my original concept was that E-money is the logical next step in the evolution of money from tokens like shells, over Babylonian tablets, over gold and silver coins, over IOUs, over banknotes, to deposits/overdrafts. Thus, economically, E-money is the pure and ultimate form of money while all other forms are more or less awkward historical forerunners.

Now, the concrete form of money is one thing, its role as means of payment and store of value in a monetary economy is quite another thing. So E-money is de facto only a small part of a comprehensive theory of money, which in turn is a small part of the true economic theory which is supposed to explain how the economy we happen to live in works. For all practical purposes, in contrast, the concrete institutional implementation of E-money is indeed of primary importance.

The general economic theory has been worked out in a series of papers which are available at the open access repository SSRN. What is of heightened interest in economics are, of course, the structural defects of the market system as a whole and of the monetary order in particular. If you are interested in more details about this wonkish stuff see for a start ‘Major Defects of the Market Economy

As far as the current special topic of E-money as piece of a large jigsaw puzzle is concerned your post is accurate.

Egmont Kakarot-Handtke



Relates to the working paper 'Reconstructing the Quantity Theory (I)'

September 22, 2015

The Coppola method: Adam Smith reincarnated?

Comment on ‘What is lending good for? The Frances Coppola view.’

Blog-Reference

“... Adam Smith ... disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter, 1994, p. 185)

Frances Coppola correctly identifies the problem: “[She] warns for a simplified view of the primary and secondary market: there are many and complicated micro-economic linkages which should not be ignored.” (See intro)

This, of course, is true but economic analysis does not consist of ‘trivialities and homely observations’ and a heap of examples. What is needed is a consistent big picture of all interconnections. Examples that are not imbedded into a comprehensive analytical framework are worthless. This is what Whitehead called the fallacy of misplaced realism.

What is missing in Coppola’s micro-partial-approach is the interconnection of total saving/dissaving, changes in the stock of money/credit/debt, and total profit/loss for the economy as a whole. For the correct approach see (2011; 2013; 2014).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Kakarot-Handtke, E. (2014). Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right. SSRN Working Paper Series, 2389341: 1–17. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press

PsySoc — the scourge of economics

Comment on David Ruccio on ‘The fundamental truth about American economic growth’

Blog-Reference

You quote a recent Science article: “... that we’re seeing right now, with the insurgent campaigns of Donald Trump and Bernie Sanders and elite hopes that they will just fade away, are ‘early skirmishes in a coming class war’.” (See intro)

It is not so much the prediction of a coming class war in the U.S. that is false but the explanation within the framework of economics.

The crucial point is that economics deals — in the first place — not with individual human behavior or society at large. This is the realm of psychology, sociology, anthropology, history, political science, etcetera. Insofar as economics deals with behavioral assumptions like utility maximization, greed, power grabbing, etcetera, it is a dilettantish variant of Psycho-Sociology or PsySoc.

The authors of the Science article argue that it is wrong to explain the problems of the U.S. economy by ‘pathologizing the poor’ and that it is necessary to turn ‘attention to the pathologies of the rich.’ (See intro)

It should be pretty obvious that economic problems cannot be explained or solved by psychology. It is known since the ancient Greeks that psychologism is the way stupid people explain the world, i.e. lightnings fly from the sky because Zeus is angry. The pathology explanation is on the same scientific level as the Zeus explanation, that is, it is exactly at intellectual ground zero.

There is some irony in the fact that the most famous predictor of imminent class war had been very explicit about the vacuousness of psychologism: “To prevent possible misunderstanding, a word. I paint the capitalist and the landlord in no sense couleur de rose. But here individuals are dealt with only in so far as they are the personifications of economic categories, embodiments of particular class-relations and class-interests. My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, can less than any other make the individual responsible for relations whose creature he socially remains, however much he may subjectively raise himself above them.” (Marx, 1906, M.9)

On closer inspection, however, Marx only replaced subjective psychologism with objective sociologism. Instead of pathological individuals we now have ‘embodyments of economic categories.’ This is somewhat better but still not good enough. What, then, is the real subject matter of economics?

As a first approximation, one can agree on the general characteristic that the economy is a complex system.

However, with the term system one usually associates a structure with components that are non-human. In order to stress the obvious fact that humans are an essential component of the economic system the market economy should be characterized more precisely as a complex hybrid human/system entity or SysHum.

The scientific method is straightforwardly applicable to the sys-component but not to the hum-component. While it is clear that the economy always has to be treated as an indivisible whole, for good methodological reasons the analysis has to start with the objective system-component. 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.

The history of the U.S. economy since around the 1920s could be retold quite realistically as a tumbling from crisis to crisis with idiots, criminals, sociopaths, swindlers, fakers, etc. grabbing for power and money.

To do so, however, is the not the proper task of theoretical economics. Economics has to explain how the actual economic system works and this implies to explain economic crises or an eventual breakdown by structural defects and not by psychological or social pathologies (2015; 2014). In other words, the pain comes from the broken leg and not from evil spirits. The economy breaks down because of overall loss, society breaks down for other reasons. These things have to be kept properly apart.

This said, is not to deny that Donald Trump could be the harbinger of the economic and intellectual breakdown of the U.S. To be quite clear, this is a serious problem of political science but by no stretch of the imagination of theoretical economics, which is a science in marked contrast to political economics, which is — and that is the fundamental truth — rubbish folk psychology and brainless gossip.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL

See also 'Economics: ‘a tale Told by an idiot, full of sound and fury’?' and 'Confounding sociology and economics' and 'The happy end of the social science delusion' and 'Economics: the honeypot for know-nothings'

September 21, 2015

Economics is an abysmal failure of reason

Comment on ‘What went wrong with economics?’

Blog-Reference

There can be only one answer to this question: economists are scientifically incompetent. Since more than two centuries Orthodoxy is unacceptable because of material and formal inconsistency,* and Heterodoxy failed to produce a superior alternative: “... 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 which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)

Of course, ‘economies operate according to universal laws’ but they do not operate according to behavioral laws because something like a behavioral law does not exists to begin with. Standard economics has been built upon the green cheese behavioral assumption of constrained optimization and from there onwards all went wrong.

Economists never understood what science is all about and this is why they never secured correct premises. “To Plato’s question, ‘Granted that there are means of reasoning from premises to conclusions, who has the privilege of choosing the premises?’ the correct answer, I presume, is that anyone has this privilege who wishes to exercise it, but that everyone else has the privilege of deciding for himself what significance to attach to the conclusions, and that somewhere there lies the responsibility, through the choice of the appropriate premises, to see to it that judgment, information, and perhaps even faith, hope and charity, wield their due influence on the nature of economic thought.” (Viner, 1963, p.12)

The whole of economics is built upon inappropriate premises. What is needed is a paradigm shift, that is, a move from subjective behavioral premises to objective structural premises (2014).**

Because of scientific incompetence, the present generation of economists has not gotten the point and will not get it. There is no hope, all that can be done is a dishonorable discharge of these people from science.

Egmont Kakarot-Handtke


References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Viner, J. (1963). The Economist in History. American Economic Review, 53(2): pp. 1–22. URL

* Watch Feynman on material consistency
** See cross-references Paradigm shift

September 19, 2015

Economists vs. Economics

Comment on Dani Rodrik on ‘Economists vs. Economics’

Blog-Reference

The diversity of contradicting economic models is the very proof that economics is a failed science. Everybody knows by now that clueless model bricolage is simply a ridiculous exercise or what Feynman aptly called cargo cult science: “They're doing everything right. The form is perfect. ... But it doesn't work.” (Wikipedia)

Economists never grasped what science is all about. What the insiders of the profession think of their dilettantish constructs is just as irrelevant as what the busy producers of epicycles thought of their geocentric paradigm.

Science is defined by material and formal consistency. Economics fails on both counts. There is no way around Joan Robinson’s conclusion: Scrap the lot and start again.

Egmont Kakarot-Handtke

Economics: ‘a tale told by an idiot, full of sound and fury’?

Comment on Dean Baker on ‘Biggest lesson from Financial Crisis: Wall Street gets what it wants’

Blog-Reference

You sum up: “The story of the decade of double-digit unemployment from which we were supposedly spared by the bailout depends on Congress sitting on its hands and doing nothing through the worst slump in 70 years. This is a political prediction, not an issue of economics.” (See intro)

Indeed, this is the crucial point: the first thing an economist has to do is to realize whether he deals with politics or economics.

The history of the U.S. economy since around the 1920s could be retold quite realistically as a tumbling from crisis to crisis with idiots, criminals, sociopaths, swindlers, fakers, etc. grabbing for power and money, with Wall St, Fed, and the national institutions as main protagonists.

The first question is, should this history be told by an economist or better by a political scientist? The answer depends on our understanding of economics. There always has been political economics and theoretical economics.

Theoretical economics deals with THE ECONOMY in roughly the same way as physicists deal with NATURE. THE ECONOMY is the world economy as a whole and this is a rather abstract entity. Abstractions have not such a large fan group.

Accordingly, the first difficulty of economics is that most people have a rather small event horizon. If they are at all interested in economic matters, myopic individuals want to learn from the economist not much more than whether the stock/property market goes up or down. Clearly, theoretical economics cannot meet these peoples’ expectations.

The second difficulty of economics is that many economists feel the urge to satisfy the expectations of a vastly more important target group than the buy-low-sell-high crowd. The classicals advertized their core competence unmistakably: “That Political Economy is a science which teaches, or professes to teach, in what manner a nation may be made rich. This notion of what constitutes the science, is in some degree countenanced by the title and arrangement which Adam Smith gave to his invaluable work." (Mill, 1874, V.7)

Note that the classicals’ definition of science departs somewhat from the genuine sciences. Note also that the focus is on ‘my’ concrete nation and not ‘the’ abstract world economy.

The third difficulty of economics is that the format of communication is predetermined by the operational specifics of the entertainment industry, that is, all communication must take the form of an interesting story or a sitcom controversy full of sound and fury. The all-decisive criterion in the realm of entertainment (including economics blogs) is like/dislike and not true/false as it is in science. Because of this, there is an irresistible bias to explain the functioning of the economy as machinations of weird/evil characters. With some inner logic economics then resembles more a psychiatric/criminal investigation than scientific research.

These three difficulties are sufficient to explain why economics never managed to rise above the level of a proto-science. As Schumpeter put it “... economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (1994, p. 827) It seems that the passengers, while busily telling their Walrasian, Keynesian, Marxian, Austrian etc. tales, are actually stranded in the middle of nowhere.

What is the biggest lesson for Heterodoxy from the permanent failure of Orthodoxy? Quite simple: either Heterodoxy participates furthermore in political economics with storytelling or it produces the true theory of how THE ECONOMY works.

Note well that already Marx realized that economics is not about human behavior: “To prevent possible misunderstanding, a word. I paint the capitalist and the landlord in no sense couleur de rose. But here individuals are dealt with only in so far as they are the personifications of economic categories, embodiments of particular class-relations and class-interests. My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, can less than any other make the individual responsible for relations whose creature he socially remains, however much he may subjectively raise himself above them.” (Marx, 1906, M.9)

Biggest lesson from the actual economic mess: economics is not about space-time specific individual human defects but about the structural defects of THE ECONOMY (2015).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

September 18, 2015

Predictably confused

Comment on Lars Syll on ‘Sir David Hendry on the inadequacies of DSGE models’

Blog-Reference

“The future is unpredictable.” (Feynman, 1992, p. 147) Four words! Compare this to what economists have uttered about this issue without getting one iota further. But wait, are physicists not famous for their accurate predictions? Could it be that economists have gotten something badly wrong?

Let us have a closer look. If you show a physicist an apple tree and ask him when every single apple will fall, then he will tell you that this kind of event is not predictable. But he can tell you something else. If an apple has started to fall then he can tell you exactly its location and velocity after t seconds. The physicist ‘predicts’ the coordinates with high precision and everyone can test it. (OK, you did not want to know this to benign with, and exactly these layman's expectations regularly cause the irritations with science.)

Likewise: imagine somebody throws blindly three coins into a large sandbox. Clearly, the three coins form a random triangle and no one can predict its form and size. Yet, the mathematician can ‘predict’ with certainty that the sum of angles is 180 degrees (if the sandbox is euclidean).

While the future is ‘unpredictable’ certain aspects may be ‘predictable’ with high precision. Therefore, we can agree with Keynes that “the price of copper and the rate of interest twenty years hence” is unpredictable without accepting his famous all-round capitulation “We simply do not know.” (Keynes, 1937, p. 214)

Example: an elementary consumption economy can be described by this deductively derived formula. This formula holds in every single period from past to future (2014, eq. (12)). In other words, we have a testable economic law. Test it twenty years hence and you will find out that it is true. Where, then, does the difficulty with prediction come in? The crucial point is that the variables that underly the four rhos are unpredictable random variables.

Perhaps it sounds a bit paradoxical: there are deterministic economic laws which hold ‘on the whole’ while the components vary at random or are even uncertain in Keynes's sense. So the concept of uncertainty can coexists with the concept of economic law. Hence, Keynesian uncertainty should not stop us from looking out for deterministic and testable economic laws. Attention, they are with absolute certainty not to be found where misguided Orthodoxy has looked for in the past!

The otherwise redundant DSGE debate shows that the representative economist is still a bit confused about the different aspects of prediction.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Kakarot-Handtke, E. (2014). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL

How to start off on the right foot

Comment on Bill Mitchell on ‘When one false starting premise leads to progressive confusion’

Blog-Reference

You say “... a current article ... shows that if one starts from a wrong premise the conclusions will lead one astray no matter how noble the intentions are. Progressives have to get the basics of macroeconomics correct before they launch into critiques of this and that.” (See intro)

This, indeed, is the crucial point of all of theoretical economics and in turn becomes the precondition of economic policy. “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)

Successful economic policy critically depends on the correct economic theory and the whole theoretical superstructure ultimately hinges on a handful of foundational premises. As you say, wrong premises lead straight away to utter confusion (see also 2013).

In order to avoid the garbage-in-garbage-out fallacy, the most important task of the economist is to see to it that his premises are true. And this is what the great methodologist and economist J. S. Mill has told his utterly disoriented fellows.

“What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (Mill, 2006, p. 746)

Standard economics has been built upon wrong premises and it is pretty obvious by now that it is a failed approach. Every economic analysis must start with the definition of the objective structure of the monetary economy because it is this structure, a.k.a. reality, that determines the outcome of individual and collective human action (2014). The monetary economy is the meta-context of every partial analysis.

Standard economics starts with the behavioral assumption of constrained optimization and this means to get off on the wrong foot. MMT starts with the objective structure of the monetary economy. This, clearly, is the right foot. However, what is still missing is an explicit and formally consistent definition of the set of foundational propositions that constitutes the new approach.

This task is of overriding importance. As you say “You can see that if you start off with a false premise ... how quickly one descends into a flawed analysis.” Or, as J. S. Mill and the methodologists of all times have said: mind your axioms. The representative economist never got this crucial point.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis: Liberty Fund. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.


Related 'Modern moronomic theory'
For details of the bigger picture see Across-references Axiomatization

September 17, 2015

Beat me! An invitation nobody can refuse

Comment on Nanikore on ‘How economists argue’

Blog-Reference

In the intro Diana Strassman gives a correct self-description of what Feynman called cargo cult science: “They're doing everything right. The form is perfect. ... But it doesn't work.” *

Frankly, everybody knows now that orthodox model bricolage is simply a ridiculous exercise. It is a waste of time even to criticize this stuff. “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)

So, replace, or help to replace, the defective orthodox models with a superior paradigm (2014) and, for heaven's sake, let all these sitcom arguers and losers stay behind the curve.

What more do you need? Here is your personal invitation: “What is really valued is coming up with a better model, a better theory.” (See intro)

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL

* See Wikipedia

Confounding sociology and economics

Comment on michael burke on ‘Marxism Revisited’

Blog-Reference

You say: “It was this point, the law of the tendency of the profit rate to fall which was Marx’s most important contribution to economic theory and his most important discovery in that field.”

Wrong. The tendency of the profit rate to fall had already been a tenet of the founding fathers of classical Political Economy.

Marx was a sociologist first and an economist second. His research program was essentially the same as classical Political Economy: "The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, ..." (Mill, 1874, V.39)

The main difference was that Marx put the social antagonisms into the foreground (no harmonizing Invisible Hand here) and derived them from economic laws: “Intrinsically, it is not a question of the higher or lower degree of development of the social antagonisms that result from the natural laws of capitalist production. It is a question of these laws themselves, of these tendencies working with iron necessity towards inevitable results." (Marx, 1906, M.6)

Marx used the supposed iron law of the falling profit rate to derive his iron law of societal evolution.

Whether Marx was a good sociologist is not our concern. What is decisive for Heterodoxy is that his profit theory is false (see 2014b). Because of this, the law of the falling profit rate is also false.

Methodologically valid economic analysis tells us, roughly speaking, that the monetary economy (national or global; capitalist or communist) moves to the brink of breakdown as soon as the growth of overall public/private debt reverses (see 2014a). How this affects the respective societies is an altogether different question to which economists hitherto have not contributed much of scientific value.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2014b). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL

Related to 'Methodology — Marx, too, messed it up'
For the broader picture see cross-references Profit

A question of principle(s)

Comment on Geoff Davis on ‘Are all models wrong?’

Blog-Reference

You ask: “Who spoke truth? Newton? Einstein? Both? Neither?”

The short answer is that Einstein is more general and contains Newton as limiting case for low speed. For economists, however, this is not the crucial point. What is much more enlightening is that both shared the same idea of truth.

Newton: “Could all the phaenomena of nature be deduced from only thre [sic] or four general suppositions there might be great reason to allow those suppositions to be true.” (quoted in Westfall, 2008, p. 642)

Einstein on generality: “For this theory [the Theory of Relativity] revealed that it was possible for us, using basic principles very far removed from those of Newton, to do justice to the entire range of the data of experience in a manner even more complete and satisfactory than was possible with Newton's principles.” (1934, p. 166)

Einstein’s fundamental methodological question: “If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way?” (1934, p. 167)

Same answer as Newton: “In a certain sense, therefore, I hold it to be true that pure thought is competent to comprehend the real, as the ancients dreamed.” (1934, p. 167)

Same answer as J. S. Mill: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (2006, p. 746)

Scientists eventually establish the truth (=material and formal consistency). In economics, indeed, all models are wrong. Economists are stuck in the morass of opinions because they messed up Mill’s opus magnum. Heterodoxy’s task is to get beyond political blather and to spell out the ‘thre or four general suppositions’ knowing from Orthodoxy’s failure already what the false answers are.

Egmont Kakarot-Handtke


References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund. URL
Westfall, R. S. (2008). Never at Rest. A Biography of Isaac Newton. Cambridge: Cambridge University Press, 17th edition.

Preceding post 'Two steps towards truth'. See also cross-references New curriculum.

September 16, 2015

Corbynomics

ICYMI (Scott Fullwiler)

Blog-Reference

You base your argument on the accounting approach and on standard Econ 101. Because both analytical elements are logically defective your version of Corbynomics has no sound theoretical foundation.

If you want Jeremy Corbyn to succeed you have to supply him with the true economic theory. “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

For the rectification of the accounting approach and Econ 101 see ‘Modern moronomic theory

To resume the ultimate fatal shortcoming of your approach: the underlying profit theory is provable false.

Egmont Kakarot-Handtke


Related to 'How to start off at the right foot'
For the bigger picture see cross-references Profit

Bound to crash

Comment on Steve Keen on ‘Why China had to crash: Part 2’

Blog-Reference

Because Orthodoxy is a scientific failure it is, indeed, an intuitively promising approach to start from the exact opposite assumptions.

Roughly speaking, you have shown that leverage, or more precisely debt acceleration, is the ultimate cause of the boom/crash of the Chinese stock market. This is equally true for the subprime meltdown in 2008 and for the crash in 1929.*

The general conclusion is that markets do not work as the textbook story suggests and that the supply-demand-equilibrium paradigm is empirically refuted for the financial markets.

The pervasive boom/crash phenomenon tells us that the institutional framework and in particular the monetary order in the U.S. is fundamentally flawed. The conclusion for China and other countries is to identify the defect and to come up with a superior institutional framework.

Until now China has mainly adopted the U.S. financial market blueprint. Therefore, it does not come as a surprise that she crashes against the wall just like the U.S. did on several occasions since 1929.

Rethinking the actual stock market crash China first of all has to ask herself (i) whether she needs a stock market in the first place, and if so (ii), whether her stock market should institutionalize the possibility of leverage.

The U.S. are not very talented at institution building. The Wall St/Fed configuration is not a success story. If China wants to overtake the U.S. she has to create a superior institutional framework.

In a sense Modigliani-Miller was right: ultimately it is a matter of indifference whether a firm is financed by equity or debt. And if equity is not needed the stock market is not needed.

What China urgently needs is the correct economic theory. Financial crashes and persistent unemployment are the empirical mirror images of false monetary and employment theories. Standard economics has scientifically crashed, that is, China needs a superior approach. Can Heterodoxy deliver?

Egmont Kakarot-Handtke


* See ‘Mathematical Proof of the Breakdown of Capitalism

September 15, 2015

How to minimize political confusion

Comment on Peter Radford on ‘Let’s all blame capitalism’

Blog-Reference

“I realize it’s fun to be ideologically committed, and that a binary worldview make life simpler, but we need to get beyond that divide.”

Economics started as Political Economy and has never recovered from getting off at the wrong foot. Your fundamental error consists in depicting economics as a world view. On the surface it is and exactly this has always been its fundamental defect.

The binary code of world views is good/bad. Accordingly, the discussion since 200 years has been whether capitalism as a specific form of organizing the national/world economy is good/bad. This discussion has been complicated — to say the least — by mixing it up with the political issue of democracy/autocracy.

Your personal criterion reduces to good old individualistic utilitarianism: “My family was liberated by the Industrial Revolution. Capitalism, if that’s what we describe the basic economic model of the past two hundred years or so, has done me proud.” That is fine for the Radford family but begs the question.

The binary code of science is true/false. And the task of economics is not to produce a world view but to explain how the actual economy works. What we have at the moment is, broadly speaking, Walrasianism, Keynesianism, and a conglomerate of political/ sociological/historical/individual storytelling.

According to well-defined scientific criteria all these approaches are false. Because economists do not know how the monetary economy works the question whether capitalism is good/bad lacks any foundation whatsoever.

Until now economics consisted essentially in praising/blaming capitalism. This is a post-Enlightenment sequel to praising/blaming Catholicism/Protestantism/Islamism/Hinduism and other belief systems.

Going beyond this unsatisfactory state of affairs means in specific and concrete terms to advance from the proto-scientific state to the scientific state, in other words, to stop producing worthless opinions and to start producing valuable knowledge.

The pivotal question for Heterodoxy is not whether English capitalism has been good/bad for the Radford family but whether economics is true/false. As Schumpeter summed up the situation: “We are not yet out of the wood; in fact, we are not yet in it.”

The alternative between left/right has always been a political distraction, the real choice for every student of economics since Adam Smith has been between political junk and science. The sad state of economics proves that the representative economist has consistently preferred the former.

What is required most urgently in order to minimize political confusion among the general public and to secure a fresh start is an explicit dishonorable discharge of economics from the sciences.

Egmont Kakarot-Handtke

The very real problem of the representative economist

Comment on Talldave on “The very real problem of wage inequality”

Blog-Reference

After more than 200 years it is pretty obvious that economics is a failed science. What has been produced so far is much opinion and little knowledge. Economists, of course, have an explanation for this. No, it is not that they are scientifically incompetent, but, somehow, it is the fault of their specific subject matter. Here is the one-fits-all excuse.

“Economics is a strange sort of discipline. The booby traps I mentioned often make it sound as it is all just a matter of opinion. That is not so. Economics is not a Science with a capital S. It lacks the experimental method as a way of testing hypotheses. . . . There are always differences of opinion at the cutting edge of a science, . . . . But they last longer in economics . . . and there are reasons for that. As already mentioned, rival theories cannot be put to an experimental test. All there is to observe is history, and history does not conduct experiments: too many things are always happening at once. The inferences that can be made from history are always uncertain, always disputable, . . . You can’t even count on a long and undisturbed run of history, because the ‘laws’ of behavior change and evolve. Excuses, excuses. But the point is not to provide excuses.” (Solow, 1998, pp. x-xi)

The fact of the matter is that the representative economist has not grasped until this very day what science is all about. He is devotedly commited to what Feynman identified as cargo cult science (see Wikipedia).

One of the crucial points of science — known since Aristotle (see Wikipedia) — is that one starts from correct premises. It is pretty obvious that a subjective concept like utility does not fit the methodological requirements.

Unfortunately, you have not realized this yet. Proof? You say: “If utility cannot be part of an economic theory, then you can’t study economics at all.” From the fact that you cannot do it, though, does not logically follow that others cannot do it either. This is the fallacy of composition — the most common among the numerous logical blunders in economics.

Of course, some people have clearly identified the crux: “... if we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions and philosophical hypotheses.” (Slutzky, quoted in Mirowski, 1995, p. 362)

Utility is a psychological assumption and the representative economist has to get rid of it. You cannot do it? That is perfectly OK, you are free to stay behind the curve as long as you wish.

Standard economics is based on the concept of utility. This program has failed. Not to realize this is the very proof of scientific incompetence. It is as simple as that.

Egmont Kakarot-Handtke


References
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Solow, R. M. (1998). Foreword, volume William Breit and Roger L. Ranson: The Academic Scribblers. Princeton, NJ: Princeton University Press, 3rd edition.

Preceding post 'The very real problem of zero scientific utility'

September 11, 2015

The very real problem of zero scientific utility

Comment on ‘The very real problem of wage inequality’

Blog-Reference

Some day in the history of economic thought economists left science and became part of the entertainment industry. Thinking, of which there was never much in the first place, has now been entirely replaced by storytelling and gossip. Fittingly, you conclude your post with “That’s because an economy that allows Cruise to be very rich will generate more good films for me to watch.”

This economy will hopefully also allow you to get entirely out of economics and devote all your time to action movie watching.

It is rather obvious that your data-decorated distribution theory is a cartoon.

(i) There is no such thing as ‘a share of profit in income’ but there is ‘a share of distributed profit in income’. Most economists do not realize that profit and distributed profit are fundamentally different economic entities. Profit is not a factor income and it cannot be functionally attributed to capital. Because of this, the distribution of the period output has nothing to do with any marginal product of labor or capital. Because the profit theory is false since Adam Smith distribution theory is fundamentally flawed since more than 200 years (2014b).

(ii) The representative economist cannot tell the difference between profit and income until this very day. This is comparable to a physicist who cannot tell the difference between force/energy or acceleration/velocity.

(iii) Keynes, too, messed up the profit theory and he knew it. “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson and Bezemer, 2010, pp. 12-13, 16)

(iv) This failure kicked off a chain reaction of errors/mistakes because when profit is not correctly defined, income is not correctly defined, and then saving is not correctly defined. Therefore, as a collateral damage, all I=S models are junk.

(v) All this happened in the 1930s. Until this very day economists have not realized that all IS-LM models are logically defective — among them Paul Krugman and you (2014a). Otherwise it is not explicable that you label your post ‘Praising Krugman’.

You characterize yourself as utilitarian, so let me sum up thus: the total and marginal scientific utility of your distribution theory is exactly zero.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. 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
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

***
ICYMI (ssumner, September 13)

The point of my post is not to ‘engage in a discussion’ but to inform you that you violate scientific standards.

“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, 1941)

Please take notice: the issue has been decided, your distribution theory is provable false. The correct distribution formula is testable and refutable and this is how matters are settled in science.

“Accordingly, scientists, in their critical discussions, do not attack the arguments which might be used to establish, or even to support, the theory under examination. They attack the theory itself, qua solution of the problem it tries to solve.” (Popper, 1994)

***
ICYMI (ssumner, September 13)

You ask with reference to your distribution theory: “How can you know it’s wrong, if you don’t know what it is?”

(i) All theories/models that take one or more of the following concepts into the premises are scientifically worthless: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic nonentities.

(ii) You call yourself an utilitarian.

(iii) No way leads from false premises, i.e. nonentities, to the understanding of how the actual economy works. From (i) and (ii) follows that your approach as a whole is methodologically unacceptable and this implies the distribution theory as a logical part thereof. That is sufficient. There is no need to discus details as there is — in analogy — no need to discus epicycles when geocentrism as a whole has been refuted. It is as simple as that but I’ll give 100 to 1 odds that you couldn’t understand nor accept it.

Back to science

Comment on ‘Unemployment – a long run’

Blog-Reference

Heterodoxy is in danger of joining Orthodoxy at the lowest possible intellectual level. To argue that figures are suspect/manipulated and to describe a situation as pathological is brain-dead political rhetoric. Does anybody think that playing the blame-game helps to stop growing unemployment?

Growing unemployment is, first and foremost, the proof that economics is a failed science. To recall: orthodox economics entails the claim/promise that all resources are fully employed or at least on the way to full employment. Even for the layman persistent unemployment is the irrefutable proof that the market economy does not work as intended or claimed.

Heterodoxy as scientific enterprise means to improve statistics if they are unreliable and to come up with a new paradigm if the old has failed.

The current situation is a clear refutation of both employment and quantity theory. There is not much use discussing these defunct theories any further. The most elementary version of the correct employment equation is summarized here.*

This equations tells us four things:
(i) Full employment is attainable.
(ii) An increase of the expenditure ratio rhoE leads to higher employment.
(iii) Increasing investment expenditures exert a positive influence on employment.
(iv) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The factor cost ratio formally represents the price mechanism which, however, works quite differently from what standard economics suggests. As a matter of fact, overall employment increases if the average wage rate W increases relative to average price P and productivity R. This is a systemic law and not a behavioral assumption.

The core of the employment problem is that the price mechanism does not work as the textbook cliche says. It is worldwide upward wage rate stickiness that produces worldwide unemployment and deflation.

Best of all: the employment equation is testable, so there is no need to continue the brain-dead orthodox/heterodox beer hall blather.

Egmont Kakarot-Handtke


* For details see ‘Major Defects of the Market Economy’ and ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

September 10, 2015

The happy end of the social science delusion

Comment on Lars Syll on ‘Are all models wrong?’

Blog-Reference

For more than two thousand years now, physicists have seen falling leaves but until this day we have no scientific theory of this phenomenon. Instead, we have the theory of gravity, motion, ballistics, etc.

The first thing to notice is that physicists are not concerned with reality as such but with certain aspects of reality. In other words, reality is narrowed down to those general aspects that can be dealt with effectively by applying tools which are already available or are developed specifically for the task at hand.

What a scientist instinctively avoids are questions that cannot be answered in principle like: is God male or female? Exactly this type of question is what occupies non-scientists most of their time.

Science is often accused of being narrow or over-simplistic. However, those who have tried to tackle the fullness of reality head-on have never produced more than colorful descriptions, interesting gossip, subjective interpretations, data-decorated hunches, or extensively interpolated individual histories. In the meantime, narrowly focused science has moved in an unbroken sequence of logical steps from the elementary Law of the Lever to the unobservable deep reality of quantum particles and quarks.

Reality is not something given and simply to be looked upon — this is the delusion of naive empiricism — but is continuously redefined in the course of scientific research itself.

While it is obvious that economics has much to do with human behavior it is a methodological mistake to primarily focus on this aspect of economic reality, just as it a mistake to focus on individual flying leaves in order to find out something general about falling bodies. No way leads from the observation of a myriad of falling leaves to the Universal Law of Falling Bodies. Likewise, no way leads from the observation of individual behavior to the systemic economic laws.

The so-called social sciences have always been a misguided endeavor. The reason is simple. “By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can't be defined so precisely’. Yes, but then you cannot claim to know anything about it.” (Feynman, 1992, p. 159)

Certain knowledge about human behavior is hard to come by, to say the least, and to circumvent this fundamental difficulty by postulating constrained optimization is of breathtaking naivety — or worse.

It has not been such a good idea to build economics on a green cheese assumption about human behavior. Therefore, “... if we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions and philosophical hypotheses.” (Slutzky, quoted in Mirowski, 1995, p. 362) see also (Hudík, 2011)

This is exactly the opposite of what may be called Hume’s methodological delusion: “And as the science of man is the only solid foundation for the other sciences, so the only solid foundation we can give to this science itself must be laid on experience and observation.” (Hume, 2012, Introduction)

The results of Hume’s program are as to be expected: “...there has been no progress in developing laws of human behavior for the last twenty-five hundred years.” (Hausman, 1992, p. 320)

The science of man, or what we call social sciences, has no solid foundation. As a matter of principle, there is no such thing as a social science. Therefore, the first methodological task is to take economics out of what Feynman aptly called cargo cult science.

The new definition of economics is objective-structural-systemic and entirely free of any behavioral connotations: economics is the science which studies how the monetary economy works. Thus, the popular yet forever pointless second-guessing of human motives and behavior can be left to psychology, sociology, political sciences, philosophy, mythology, literature or science fiction.

Economics is a failed science and the ultimate cause is given with this definition: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.“ (Arrow, 1994, p. 1)

Accepted economics is scientifically unacceptable.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.


Related 'From PsySoc to SysHum' and 'The Science-of-Man fallacy' and 'PsySoc — the scourge of economics' and 'The art of start' and 'A farewell to PsySoc economics' and 'Redefining economics' and 'Economics vs. Sociology' and 'Questions and answers about economics'.

***
ICYMI (Henry, September 13)

True to form, economists got also the criterion of simplicity into the wrong throat: “Others, the inexperienced students, make guesses that are very complicated, and it sort of looks as if it is all right, but I know it is not true because the truth always turns out to be simpler than you thought.” (Feynman, 1922)

Economists explain their failure regularly with the complexity of the subject matter. This argument does not hold water.

“But in fact, there are good reasons, not only for the belief that social science is less complicated than physics, but also for the belief that concrete social situations are in general less complicated than concrete physical situations.” (Popper, 1960)

‘All models are false’ is a correct obeservation as far as standard economics is concerned, but the usual explanation is misleading.

“I think we have to admit that most successful scientific theories are lucky over-simplifications. (Popper, 1994)

The key word is lucky.


Preceding post 'Two steps towards truth'

September 9, 2015

Two steps towards truth

Comment on ‘Are all models wrong?’

Blog-Reference and Blog-Reference

“So the idea of truth (of an 'absolute' truth) ... is our main regulative idea.” (Popper, 1994, p. 161)

To give up the idea of truth is to give up science and this leaves one with no alternative but to settle questions by applying the full spectrum of political means, as humankind has done before science could establish itself.

Economics is still at the proto-scientific stage: “Within the whole of his [the economist's] science, or what he insists on calling science, no generally recognised result is to be found, as is also the case for theology and for roughly the same reasons; there is no single doctrine taken to be a scientific truth without the diametrically opposed view being similarly upheld by authors of high repute.” (Wicksell, quoted in Deane, 1983, p. 8)

One possible reaction to this embarrassment is to give up the idea of objective truth in economics. This attitude is rather popular among heterodox economists — and it is self-defeating.

“If economics cannot aspire to any substantive knowledge of economic relationships, it cannot speak with authority about questions of economic policy.” (Blaug, 1990, p. 111)

Without this aspiration economics degenerates to mere opinion, political economics, and in the last consequence to a rather ordinary power struggle.

The procedure is quite different when truth is the regulative idea. This is common knowledge since J. S. Mill: “A method of obtaining accurate premises is needed because science can only be true if its premises are true. Because facts alone cannot bring us to the truth, he seeks the answer in logic. Mill praised the Schoolmen for recognizing that scientific procedure consists in ascertaining premises and deducing conclusions. (Redman, 1997, p. 328)

The first step is to recognize that all models are wrong that are built upon the following premises: utility, expected utility, rationality/bounded rationality/animal spirits, equilibrium, constrained optimization, well-behaved production functions/fixation on decreasing returns, supply/demand functions, simultaneous adaptation, rational expectation, total income=value of output/I=S, real-number quantities/prices, and ergodicity. All these items are economic nonentities.

The second step is to replace these unacceptable premises. This is not an easy task, yet Heterodoxy has one decisive advantage vis-à-vis Orthodoxy: “It is the optimistic theory that science, that is real knowledge about the hidden real world, though certainly very difficult, is nevertheless attainable, at least for some of us.” (Popper, 1994, p. 192)*

Egmont Kakarot-Handtke


References
Blaug, M. (1990). Economic Theories, True or False? Aldershot, Brookfield, VT: Edward Elgar.
Deane, P. (1983). The Scope and Method of Economic Science. Economic Journal, 93(369): 1–12. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Models, Instruments, and Truth, pages 154–184. London, New York, NY: Routledge.
Redman, D. A. (1997). The Rise of Political Economy as Science. Methodology and the Classical Economists. Cambridge, MA, London: MIT Press.

* For details see cross-references Paradigm shift

Like an ant on the Möbius strip

Comment on ‘The Fed Must Banish the 1970’s Inflation Devil’

Blog-Reference

The question is about the relationship between average price, employment, average wage rate, average productivity, total demand and quantity of money. This relationship has been discussed extensively in the 70s under the heading Phillips curve but never solved.

The testable relationship between the aforesaid variables is given here. The theoretical underpinning is given here (2012; 2014). The two working papers make it also understandable why the representative economist cannot do other but senselessly repeating his well-trodden path on the Econ 101 Möbius strip. Better the Fed banishes this guy first.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

September 8, 2015

Lack of understanding

Comment on ‘Revealed Preferences: Fed Inflation Target Edition’

Blog-Reference

You quote: “A recent Wall Street Journal article reporting from the Jackson Hole Fed meetings led with this opening sentence: ‘central bankers aren't sure they understand how inflation works anymore’."

The fact of the matter is that central bankers never really understood inflation. This was not a problem, however, as long as their naive quantity theory seemed to work. We know from the history of science that false theories — e.g. Aristotle’s theory of motion — work satisfactorily in everyday situations. Most of the time the falseness of false theories is invisible to the naked eye.

The current economic situation is a clear refutation of both commonplace employment and quantity theory. The core of the unemployment/deflation problem is that the price mechanism does not work as standard economics suggests.

This theory failure cannot be overcome by speculation about the Fed’s motives. This second-guessing invariably ends with the aha-insight ‘they’ serve themselves or their buddies.

This misplaced psychologism obviously cannot explain inflation/deflation. Science works differently. The correct formula for the market clearing price in the simplified consumption good industry is given here.

Roughly, the formula says that the consumer price index declines if (i) the average expenditure ratio falls, (ii) the wage rate falls, (iii) the productivity increases, and (iv) the employment in the investment good industry shrinks relative to the employment in the consumption goods industry. The formula follows from (2014, Sec. 5).

The crucial message is that the wage rate is the nominal numéraire of the price system. If at all, the quantity of money plays an indirect role via the expenditure ratio and the employment relation of the investment good and the consumption good industry.

The rule of thumb says: if wage increases for the business sector as a whole lag behind productivity increases deflation occurs (the rest of the price formula kept constant).

Science is not about producing pointless behavioral speculation but about producing testable systemic laws. This is how economists could really help the clueless Fed to understand inflation/deflation better.

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

Trapped in false alternatives

Comment on ‘Validity is NOT enough’

Blog-Reference

It is not such a big mystery why economics is a failed science. The IT-crowd aptly sloganized the explanation with garbage-in-garbage-out, that is to say in more general terms, if the premises are false the result will be false even if the reasoning between premises and conclusions is impeccable. It is pretty obvious that standard economics is based on nonenties (utility, expected utility, rationality, equilibrium, constrained optimization, well-behaved production functions, etcetera). Nothing of scientific value will ever follow from these premises.

In order to make progress the nonentities have to be replaced with something that has a correspondence in the real world. There is no choice between valid evidence and sound evidence and there is no trade-off between empiricism and deductivism. Both are needed, and both have been thoroughly misunderstood throughout history.

One of the best examples of idiotic empiricism has been given by Bacon: “Bacon, the philosopher of science, was, quite consistently, an enemy of the Copernican hypothesis. Don’t theorize, he said, but open your eyes and observe without prejudice, and you cannot doubt that the Sun moves and that the Earth is at rest.” (Popper, 1994, p. 84)

On the other hand, one of the best examples of idiotic deductivism is to be found in economics and has been delivered by Debreu’s General Equilibrium Theory.

The pitfalls of methodological argument are twofold:
(i) Sound empiricism, e.g. Tycho Brahe, has been played against idiotic deductivism.
(ii) Genial deductivism, e.g. Euler, Newton, Einstein, has been played against idiotic empiricism.

Unfortunately, traditional Heterodoxy has not manged to get out of this quagmire of false alternatives.

What should be evident by now to every economist is that science is not defined by either/or but by the synthesis of sound empiricism and genial deductivism. The hallmark of economics is that it lacks both.

Egmont Kakarot-Handtke


References
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, pages 82–111. London, New York, NY: Routledge.