December 11, 2015

How economists became the scientific laughing stock

Comment on ‘The blatant absence of empirical fit of macroeconomic models’

Blog-Reference (pointers to this post on the Lars P. Syll blog and the Stumbling and Mumbling blog)

The brief explanation for the failure of macroeconomics is that economists from Adam Smith onward have been incompetent scientists.

This is not recognizable for the layperson and therefore, what the genuine scientist Feynman identified as cargo cult science is taken by the general public as the real thing. Needless to emphasize that the public perception is hallucinatory, but because it is widely shared it constitutes social reality. In general, most of what is called reality is a social construct.

But not only laypersons have a rather superficial intuition of what science is, the representative economist, too, has no real grasp. What should be abundantly clear is that science deals with the relation between theory and fact. A good theory tells one how a certain realm of reality works. Logically and empirically hardened theory is the highest and most extensive form of knowledge that is humanly possible. As Kant said: “There is nothing so practical as a good theory.” The good theory puts an end to common sense.

The theory of fire, for example, explains fire as an interaction of certain materials and oxygen and the laws of energy conservation/transformation. The theory is general, that is, it holds in all cases but neither predicts nor describes a historically concrete case “We are very far from being able to predict, even in physics, the precise results of a concrete situation, such as a thunderstorm, or a fire. (Popper, 1960, p. 139)

There are two concepts of reality here. The crucial point to notice is that science looks for what remains unchanged in time, i.e. the eternal laws, history in marked contrast looks at how the concrete situation changes and evolves over time. Science is not concerned with individual historical events except as a singular manifestation of a general law. A concrete historical event can either corroborate or refute a theory. So there are touching points where the two realities become one. An empirical test is a case in point, unsought experience is another.

Accordingly, there is a division of labor among scientists. In physics for example we have the distinction between theoretical and applied physicists. The T-scientist searches for the laws that govern a certain realm of reality, and the A-scientist uses these laws for the solution of practical problems. For the T-scientist a theory embodies pure knowledge and nothing else.

Here is the classical case that shows the different mind-sets of the T- and the A-type: “At one point in that 100 years, Lord Ernest Rutherford was visited by a minister of the Queen. He proudly and busily demonstrated what he had learned about radio. The minister said, that’s all very good, but what is it good for. Lord Rutherford replied that he did not know, but he guaranteed that at some point the government would tax it.” (Source)

With regard to theory the T-type asks is it true or false, the A-type asks what is it good for. The pure practitioner as a limiting case of the A-type is guided by a self-made informal ‘theory’ and resorts to trial and error and experience. In the strict sense only the T-type is a scientist because he is guided by the criteria of material and formal consistency which ultimately define scientific truth.

In economics it is similar. The theoretical economist tries to find out which laws govern the economy. The applied economist uses this knowledge for a purpose. Adam Smith, for example, told the political sovereign and the public how to make their nation wealthy. He was at the same time a theoretical and a political economist. Political economists are agenda pushers; in marked contrast, theoretical economists are knowledge pushers and nothing else. What Ricardo, Malthus, Marx, Keynes, Hayek or Friedman as obvious agenda pushers had in common was that they produced much opinion and little knowledge or none at all.

As a rule, in economics the A-type claims to push the welfare of humankind, the wealth of their nation, the cause of capitalists/landowners/workers or other social subgroups, the profit of his employer/customer, or he simply tries to get rich on the stock market. The A-type is interested in theoretical economics only so far as it serves his agenda. What he is content with is a simple model that works in his specific domain for the time being. Eternal laws, the concern of the T-type, is not the concern of the A-type. The latter's relationship to science is instrumental, parochial, and dilettantish.

The A-type is dependent on the T-type. If the T-type fails, the model of the A-type is hanging in the air. This is the case in economics (in contrast to engineering/physics). No Walrasian, Keynesian, Marxian, or Austrian economic policy advice has a sound theoretical foundation.

The blatant problem of economics is that the agenda pushers — political economists in particular — have no consistent economic theory to works with. And the ultimate reason is the scientific incompetence of the theoretical economists of the Walrasian, Keynesian, Marxian, or Austrian sect.

Presently, economics consists of a heap of special purpose models which are either partial/commonsensical/idiosyncratic or provable false if generalized. A materially and formally consistent theory of how the monetary economy works is lacking until this very day.

The distinctive mark of incompetence is that the profit theory is false since Adam Smith, that is, economists have no idea of the central phenomenon of their subject matter. And this is how they became the scientific laughing stock.

Methodologically, the ultimate reason for the overall scientific failure is that the foundational propositions, aka axioms, of economics are false.* This explodes the whole theoretical superstructure.

Therefore, the one and only task of theoretical economics is to rectify the axiomatic foundations of economics. The clueless multiplication of hanging-in-the-air models is pointless. It did not work in the past and it will not work in the future.

Theoretical economics, which has to satisfy the criteria of material and formal consistency, has to be put on sound axiomatic foundations (2014). From this then follows the correct formula of overall monetary profit and the correct employment formula and so on to distribution and growth theory.

The exemplary formulas contain nothing but measurable variables, which means that their empirical fit can be readily established. This ultimately leads from worthless political economics and model bricolage to economics as a science.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.

* See ‘Scientific Cave men with a daunting message’ and ‘The ur-blunder of economics and its rectification

For details of the bigger picture see cross-references Incompetence

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ICYMI (comment on Heribert Genreith of Dec 10 on Dec 12)

You are perfectly right: the Euler equation is ultimately irrelevant for the question on hand. The crucial point is the interrelation of change of private/public debt (= new credit/ redemption), profit/loss, employment and real output. For the formally correct representation see (2014).*

References
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL

* See also cross-references New curriculum and cross-references Debt

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