December 5, 2015

The Ur-blunder of economics and its rectification

Comment on Lars Syll on ‘The model of all economic models’


It is well known that all mainstream economic models — elaborations on the ur-model — are false, but the representative economist is not quite sure what the ur-blunder is. So let us settle this crucial point here once and for all.

(i) Economics is the science which studies how the monetary economy works.

(ii) It is a fact that the economic system is populated by acting human beings which are embedded in institutions.

(iii) Despite this commonsensical fact, economics is not the study of individual/social human behavior. This is the subject matter of psychology, sociology, anthropology, political science and other so-called social sciences. It is all closely interwoven, of course, but economics is about the economy and not about society.

(iv) Economics (a) uses the findings of other sciences, and (b) must not in one single case contradict the findings of other sciences. Therefore, theoretical economics is by no means free to apply self-invented behavioral or systemic assumptions. This mutual dependency is the meaning of interdisciplinarity.

(v) Methodological impossibility theorem: No way leads from the understanding of human behavior to the understanding of how the monetary economy works. Analogon: No way leads from the understanding of the behavior of passengers and crew of an airplane to the understanding of how airplanes can fly (which depends on the laws of aerodynamics and other scientific laws). The objectives, motives, expectations, actions of passengers/crew can explain why a flight from A to B takes place but they cannot explain how flying is possible. Likewise in economics. As a matter of principle, behavioral assumptions like constrained optimization cannot explain how the economic system works, evolves and eventually ends.

(vi) Because of (i) to (v) the research program of standard economics was bound to fail from the very start.

(vii) The program is verbally given as follows. “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research ... includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals ...” (Arrow, 1994, p. 1)

The program is specified by the propositions CA1 to CA4 and AA1 to AA8 above (see intro). This set is referred to as neoclassical axioms (see also Weintraub, 1985, p. 147).

Proposition CA4 relates to a systemic property and states that interaction between individuals result in an equilibrium. Methodologically, this is a petitio principii.* It is inadmissible to put a systemic property like equilibrium, which cannot be known at the start of the analysis, into the premises.

(viii) The failure of standard economics is due to the fact that an essential condition of scientific analysis has not been met. Aristotle famously put it thus: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”**

Now it holds
(a) the premise CA4 (equilibrium) is not certain/true/primary,
(b) the premise of a rational actor, CA1-CA4, is not certain/true/primary.
And from this follows: the axiomatic basis of the ur-model is defective and forever inadmissible.

(ix) As Morishima put it “If the axiom is deemed to be incorrect it must be modified or instead a correct axiom must be found.” (1984, p. 53) What is required in the actual situation is a paradigm shift, that is, the total replacement of the standard axiom set.

J. S. Mill clearly formulated the starting problem, but neither the classicals nor the schools to follow solved it. “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)

Economists failed at the opus magnum. The fundamental economic concepts income and profit are ill-defined since Adam Smith. And this means that employment theory, distribution theory, growth theory, and all the rest is provable false (2015). Neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian school satisfies scientific standards.

Conclusion: Since the methodological turn of Jevons/Walras/Menger standard economics is definitively on the wrong track. Numerous refinements since their time and the use of advanced mathematical tools cannot alter this fact. The defect resides in the axiomatic foundations.

The representative economist has not got the point until this very day. As Krugman put it on his blog “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point ...”. After more than 100 years of failure this is sorta-kinda stupid.

Economic analysis has to start with the definition of the objective structure/behavior of the economic system as a whole. So, economics has to be seen not as a so-called social science but as a systems science. The set of axioms as enumerated in the intro has to be fully replaced by a set of objective structural axioms.***

It is high time that economics becomes — what it falsely claimed to be — a science. That much is certain, though, mainstream economists are not up to the challenge of a paradigm shift. For them, now is the moment to say goodbye with a rest of scientific propriety.

Egmont Kakarot-Handtke

Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. 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
Morishima, M. (1984). The Good and Bad Use of Mathematics. In P. Wiles, and G. Routh (Eds.), Economics in Disarry, pages 51–73. Oxford: Blackwell.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal.American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* Wikipedia
** Wikipedia
*** For a start see cross-references New Curriculum

Related 'One entirely sufficient reason for the shutdown of economics' and 'Economics is a scientific zombie waiting to be put down'