February 28, 2016

Going beyond sitcom economics

Comment on Lars Syll on ‘Bernie Sanders and the Verdoorn law’

Blog-Reference and Blog-Reference and Blog-Reference  adapted to context

Both, the neoclassical and the Keynesian approach are known to be worthless because their respective foundational premises are false. Proofs have been given elsewhere.*

Because neither side argues within a formally and empirically consistent theoretical framework, the Friedman—RomerRomer debate is sitcom economics.

What is obviously needed for the evaluation of any political program is the correct employment theory. The general public tends to think that economists have developed this theory over the last centuries. But this has not been the case.

To cut a meticulous formal derivation short, the most elementary version of the correct employment equation is given here. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE>1 indicates credit expansion, a ratio rhoE<1 indicates credit contraction/debt repayment of private households.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export. The equation contains only measurable variables and is testable, so there is no need for the usual clueless filibuster.

Item (i) and (ii) is familiar since Keynes. What is missing in the Keynesian employment multiplier, though, is the ratio rhoF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment increases if the average wage rate W increases relative to average price P and productivity R.

The employment equation says that an increase of investment expenditure or deficit spending increases employment. The multiplier, though, is different from Keynes’s flawed multiplier (2012). The crucial difference consists in rhoF.

Now, the fact of the matter is, that an increase of productivity counteracts the expansive effect of investment or deficit spending. That is to say, if a Verdoorn effect indeed exists, which is an entirely different question, then it keeps employment roughly at the current level (2011). So, the Verdoorn effect does not help, but hinders.

To increase overall employment requires an increase of rhoF and this means that the expansion must be wage driven, i.e., the increase of the wage rate must be such that it overcompensates the retrograde effects of productivity and price increases.

To be sure, the correct employment theory is far beyond the horizon of Friedman, RomerRomer and the blathering rest of sitcom economists.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Increasing Returns and Stability. SSRN Working Paper Series, 1921267: 1–19. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL

* See blog and working papers.
***
REPLY to Nanikore on Feb 29

As I said in the post above: “The [employment] equation contains only measurable variables and is testable, so there is no need for the usual clueless filibuster.”

If historians have the periods well documented, all that has to be done is to put the data into the employment equation and to check whether the employment figure comes out correctly. See also the post ‘Prediction does not work? Try retrodiction first

This is how economics as an empirical science works.

***
REPLY to Lafayette on Feb 29

There is no need to repeat yourself. As I said in the post above: “The [employment] equation contains only measurable variables and is testable, so there is no need for the usual clueless filibuster.”

All that has to be done is to put the data into the employment equation and to check whether the employment figure comes out correctly. This is how economics as an empirical science works but, of course, this never happened.

Economics is a failed science and you (and Friedman, Romer/Romer, Krugman, etc) are part of it.

***

REPLY  to Nanikore on Feb 29

It is pretty obvious that you have no idea how science works.

(i) The first thing to know is that genuine scientists do not predict at all, see ‘Scientists do not predict’. Therefore, your WWII argument is beyond silly.

(ii) Historians have no say in science because they cannot rise above the level of storytelling: “That is why Descartes said that history was not a science — because there were no general laws which could be applied to history.” (Berlin, 2002, p. 76)

(iii) The fact that scientists do not predict the next political or natural disaster is perfectly compatible with making a projection under the IMPLICIT condition that no disaster happens. Every TV watcher understands that the weather forecast for the weekend holds under the IMPLICIT condition that the world is not blown up in the meantime.

(iv) That the world is complex is not such a new insight as you seem to think, and even the dullest Econ 101 student knows by now from J. S. Mill how to deal with it: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (1874, V.55)

(v) If you had done your homework you would also know this from Walras: “Any order of phenomena, however complicated, may be studied scientifically provided the rule of proceeding from the simple to the complex is always observed.” (2010, p. 211)

(vi) The major problem of economics is not the complexity of the world but the stupidity of economists who can until this day not tell the difference between income and profit: “We know from the history of science that entrenched classificatory schemes and misleading descriptive vocabularies have impeded scientific advance as much or more than the complexities and observational inaccessibility of the subject matter.” (Rosenberg, 1980, p. 114) *

(vii) Is it not curious that economists are deeply convinced that ‘I know that I know nothing’ is a statement humanity needs urgently for enlightenment and must, therefore, be repeated ad nauseam?


References
Berlin, I. (2002). Freedom and Its Betrayal. London: Chatto Windus.
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
Rosenberg, A. (1980). Sociobiology and the Preemption of Social Science. Oxford: Blackwell.
Walras, L. (2010). Elements of Pure Economics. London, New York, NY: Routledge.

* See ‘How the intelligent non-economist can refute every economist hands down


***

REPLY  to Lafayette on Feb 29

It is pretty obvious that you have confused yourself into a cul-de-sac.

(i) The first thing to know is that genuine scientists do not predict at all, see ‘Scientists do not predict’.

(ii) Historians have no say in science because they cannot rise above the level of storytelling: “That is why Descartes said that history was not a science — because there were no general laws which could be applied to history.” (Berlin, 2002, p. 76) See also (2014) and the post ‘Prediction does not work? Try retrodiction first’.

(iii) Economics is NOT a science of human behavior but of the behavior of the economic system. See ‘The Science-of-Man fallacy’ and ‘Economics — the fly that cannot see the glass’.

(iv) The major problem of economics is not the complexity of the world or the unpredictability of history but the scientific incompetence of economists who can until this day not tell the difference between income and profit. See ‘How the intelligent non-economist can refute every economist hands down’.

(v) Economics is a failed science because Walrasianism, Keynesianism, Marxianism, Austrianism is provably false. Provably means that wish-wash, filibuster, or blather does not help. Donald Trump has a pertinent message for the representative economist: ‘You are fired!’


References
Berlin, I. (2002). Freedom and Its Betrayal. London: Chatto Windus.
Kakarot-Handtke, E. (2014). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL

February 26, 2016

Postmodernism — the philosophy of scientific write-offs

Comment on Robert R Locke on ‘The problem of postmodernism in American economics: an historian’s perspective’

Blog-Reference

Science is about true/false and it is decisive to determine the one or the other with the highest possible certainty. Vague propositions/theories are, to begin with, scientifically worthless: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman, 1992, p. 158)

And exactly this is the reason why vague theories are so popular among non-scientists in general and economists in particular. As the Keynesians say: “it is better to be roughly right than precisely wrong!” (Davidson, 1984, p. 574)

Economists know very well that economics is still at the level of storytelling and that it does not satisfy well-defined scientific criteria: “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)

What holds for economics, holds for the so-called social sciences a fortiori. It is therefore no surprise that postmodernism thrives yonder. The natural habitat of all scientific write-offs is the pluralistic no-man’s land between true and false where “nothing is clear and everything is possible.” (Keynes, 1973, p. 292)

In this no-man’s land nobody can be refuted and this is quite fine for all who have nothing to offer but scientific garbage yet claim to have an explanation for everything: “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)

For all who know nothing but feel the urge to say something, postmodernism is the philosophical outfit of choice.

Egmont Kakarot-Handtke


References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Solow, R. M. (1998). Foreword, volume William Breit and Roger L. Ranson: The Academic Scribblers. Princeton, NJ: Princeton University Press, 3rd edition.

Immediately preceding post 'How to creatively destruct Orthodoxy'

***

REPLY  to Ken Zimmerman on Feb 28

You write: “Science is about observing first. Then theorizing (if useful) can set up testing of what we think we have observed.”

(i) With regard to empiricism, you are light years behind the curve. For details see the post ‘Economics, too, has been almost ruined by the bigots of common sense’.

(ii) About how science works I have have given this quote in the preceding post above: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Read more. Think more. Blog less.

IS-LM is dead and waiting to be buried

Comment on Nick Rowe on ‘IS-LM pictures with interest on money’

Blog-Reference and Blog-Reference

“But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281) Curiously, neither proponents nor opponents of Keynesianism have grasped until this very day what is actually in the Keynesian system (2011; 2014).

The formal foundations of Keynesianism are logically defective since the General Theory. Keynes’s fundamental equations of macroeconomics (1973, p. 63), i.e. “Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.” are provable false.

The deeper reason is that Keynes — just like his predecessors, fellows, and successors — did not come to grips with profit.

“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 et al., 2010, pp. 12-13, 16)

All IS-LM models suffer from the same fundamental defect and are dead since Hicks’s prototype. Economists, though, have still not fully grasped this.*

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University 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

* For details of the bigger picture see the cross-references and 'I=S: Mark of the Incompetent'

Scientists do not predict

Comment on Lars Syll on ‘Macroeconomic machine dreams’

Blog-Reference and Blog-Reference on Feb 27

A theory cannot be dismissed because it cannot predict the future. Therefore, as a matter of principle, economics from Jevons/Walras/Menger to DSGE cannot be dismissed because it has not predicted crises. Neoclassics is unacceptable because it is logically and empirically inconsistent. In more colloquial terms, all models that have been built and are still being built upon the maximization-and-equilibrium axioms have to be rejected straightforwardly as scientific garbage and not for any other reason.

Who in all history has been preoccupied with prediction? Mainly two groups, (i) prophets, doomsters, apocalyptics, fear mongers, gurus, utopians, astrologers, Pythia and other oracles, rise-and-fall historians/sociologists, politicians, and (ii), people who want to make a killing in the casino of Monte Carlo or on the stock-market.

No scientist is occupied with the prediction of historical events because it is long known that “The future is unpredictable.” (Feynman, 1992, p. 147)

The point is that scientists use the word prediction in a quite different sense from everyday usage. For example, Einstein deduced gravity waves from his theory in 1916 and in our days, 100 years later, they are observed. Only in the very specific sense of ‘testable hypothesis’ scientists make a ‘prediction’.

All this is well-known among methodologists: “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)

So Arrow’s argument that long-run weather forecasts are pointless is not a great revelation but an additional proof that neoclassical economists never understood what science is all about. And just because of this, economics has never been anything else than a cargo cult science. This, too, is well known: “Suffice it to say that, in my opinion, what we presently possess by way of so-called pure economic theory is objectively indistinguishable from what the physicist Richard Feynman, in an unflattering sketch of nonsense ‘science,’ called ‘cargo cult science’.” (Clower, 1994, p. 809)

In the sense of a self-description, the Keynesian “we simply do not know” applies to economists since more than 200 years. That economists are incompetent scientists that much we know for sure — and it holds with absolute certainty for both orthodox and heterodox economists.

So we can predict that nothing of real scientific value will ever come from these folks, in perfect analogy to the prediction of physics that pigs will never fly.

Egmont Kakarot-Handtke


References
Clower, R. W. (1994). Economics as an Inductive Science. Southern Economic Journal, 60(4): 805–814.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.

Related 'Prediction does not work? Try retrodiction first' and 'What is dead certain in an uncertain world: economists’ abysmal incompetence' and 'ICYMI Prediction/Forecasting'

February 24, 2016

How to creatively destruct Orthodoxy

Comment on Robert Locke on ‘The problem of postmodernism in American economics: an historian’s perspective’

Blog-Reference

1. Avoid all political distraction

Political issues are about good/bad or like/dislike, that is, they invite moralizing, guesswork, and the parading of opinions. Now, science is about knowledge and not about opinion. Opinion embraces all issues that have not yet been decided by objective means or cannot in principle be decided. Therefore, the defining characteristic of genuine scientists is to first of all put aside all issues that cannot be decided by objective means. Non-scientists, to the contrary, are irresistibly attracted by issues that have no clear-cut true/false answer but can be waffled about inconclusively until the end of days. All Human-Nature issues belong to this category.

All questions that cannot be answered by scientific means fall into the realm of politics in the widest possible sense and are answered by storytelling. Each culture consists to the greater part of incoherent narratives which are reinforced by subjective emotions and to the smaller part of objective scientific knowledge which is established by proof (logical and empirical). Most of what people experience as reality in their lifetime is a contingent social construct.

So, basically, politics (= opinion, belief, faith, philosophy, common sense, delusion) and science are the great antagonists. As Aristotle put it: “There cannot be both opinion and knowledge of the same thing at the same time.” (Posterior Analytics)

Scientific knowledge does not and, as a matter of principle, cannot come from political debate. Here is how science is done: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

2. Spot the fatal disconnect

The first thing to notice is that economics has started as Political Economy and never really got out of it. As a result, economics has not produced much of real scientific value since Adam Smith.

This has never been a disadvantage because the general public is satisfied with narratives and opinions and can neither realize nor establish whether the assertion of an economist about the economy is well-founded or not.

Because economists have failed to develop the true theory their economic policy advice has, as a rule, no sound scientific foundation. This applies to Walrasianism, Keynesianism, Marxianism, and Austrianism.

The situation, then, is this: Whether economic advice or an economic argument is derived from interpreting a model or from reading tea leaves makes no real difference. Because of the vacuousness of the model the scientific content is zero in both cases.

“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)

Because economists do not have the true theory all their political arguments are hanging in the air. Neither the arguments for nor against the market economy have a scientific foundation. What instead has been produced is storytelling and political blather.

Orthodox economics is provable false and heterodox economics has not developed a superior alternative. After more than 200 years economics is a failed science. Economists know many isolated practical details but have no idea of how the economic system works. They are like astronomers before the concept of gravity was understood and written down in a neat formula.

3. Go to the roots

Theories have an architectonic structure. A well-formulated theory is built upon a small set of premises, a.k.a. axioms. In most cases it is here where errors and mistakes reside: “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most. (Georgescu-Roegen, 1970, p. 9)

What, then, are the premises of orthodox economics? “The program is organized around the following hard core propositions:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

Except for HC6, all hard core propositions, a.k.a. axioms, are behavioral assumptions. From these the so-called law of supply and demand is derived and so on. The whole of marginalism depends on HC3. Now the iron methodological rule says: garbage in, garbage out. Because HC3 and HC5 are patently false no such thing as a behavioral law of supply and demand exists. Equilibrium, too, is an inadmissible premise. Therefore, the whole theoretical superstructure of orthodox economics falls apart.

The crucial methodological mistake is to fancy that economics is a science of behavior. It is NOT (Hudík, 2011). Human behavior is the subject matter of psychology and sociology. Economics is a system science, it does not belong at all to the so-called social sciences.

Because of this, the green cheese assumptions HC1 to HC6 have to be fully replaced by something rock-solid. This is called a paradigm shift and this is the proper task of Constructive Heterodoxy.*

4. Declaration of Incompetence

Boiled down to the essentials, Orthodoxy’s methodological position is “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman)

These premises are provable false. Because of this, the whole theoretical superstructure from Jevons/Walras/Menger to DSGE is false. Not to realize the axiomatic falsity of standard economics is the ultimate scientific incompetence of proponents and opponents alike. It should be obvious that there is no place for the scientific incompetent in academia, neither in postmodern America nor elsewhere.

Economists owe the general public the information that they cannot be taken seriously until further notice.

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

* For an overview see cross-references

***

REPLY  to Robert R Locke on Feb 25

You write: “When the neo-classical economist states that ‘demand for labor varies inversely to wages,’ he uses a neutral ‘scientific’ language, a principle of economics.” (See intro)

You treat the statement ‘demand for labor varies inversely to wages’ as part of a meta-narrative which is told by the dominant group in order to ‘send actual working people on a race to the bottom in their competition with each other.’

This is the paradigmatic explanation pattern of myth/religion/politics: Some powerful group (gods/elite) has good/bad intentions/temper and sends goodies/badies to humankind or a subgroup thereof. Clearly, every event in the world can be ‘explained’ with such a narrative. People like this stuff because it gives them the feeling of understanding how the world works.

The scientific way is to avoid all speculation about what goes on in the heads of some real or imaginary agenda pushers and to focus on the statement under discussion.

And, lo and behold, when we stop storytelling and start thinking we find out that the statement ‘demand for labor varies inversely to wages’ is provable false.

The correct employment equation says: Overall employment increases if the average wage rate increases relative to average price and productivity.* This relationship is testable, which means that there is no need at all to waffle about it.

The correct employment equation holds, no matter what silly narratives are told and believed by different social groups — or by scientifically incompetent economists, for that matter.


* See the post ‘Have data, lack theory’ and the working paper ‘Essentials of Constructive Heterodoxy: Employment

Related 'Scientists do not predict' and 'Going beyond sitcom economics'.

February 22, 2016

Economics — the fly that cannot see the glass

Comment on ‘On the non-existence of economic laws’

Blog-Reference

Hans Albert is, of course, right. Economists copied physics and produced what Feynman called a cargo cult science. The latter is roughly defined as: the outer form looks like science, but it is not science, and it does not work (see also Mirowski, 1995).

What went badly wrong is that economists tried to find laws where there are none. A case in point is the law of supply and demand. The methodological crux is that there is no such thing as a behavioral law.

Hans Albert is, of course, wrong. He sees economics as a social science. This error he shares with orthodox economics. To recall: “The [neo-Walrasian] program is organized around the following hard core propositions:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

Except for HC6, all hard core propositions, a.k.a. axioms, are behavioral assumptions. From these proposition the so-called law of supply and demand is derived. Now the iron methodological rule holds: garbage in, garbage out. Because HC3 and HC5 are patently false no such thing as a behavioral law of supply and demand exists. Equilibrium, too, is an inadmissible premise. The whole construct is cartoon science.

Now, the foundational mistake is to fancy that economics is a science of behavior. It is not (Hudík, 2011). Human behavior is the subject matter of psychology and sociology. Economics is a system science.

Because of this, the green cheese assumptions HC1 to HC6 have to be fully replaced by something rock-solid. First of all, one has to do away with methodological individualism, i.e. HC1. Ergo:
(0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(i) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(ii) O=RL output O is equal to productivity R times working hours L,
(iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X (for the graphs see 2012).

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimalist, that is, it cannot be reduced further, only expanded. The set contains NO nonentities like maximization or equilibrium and NO normative assertions, and this is exactly how it should be.

The whole theoretical superstructure, which includes the evolution of the economic system in historical time, real capital formation, profit and income distribution, money, land, resources, the financial sector etcetera has to be reconstructed starting with the absolutely transparent set (i) to (iii). This minimalist foundational set has to be consistently expanded.

With the correct objective (= behavior-free) premises we arrive at the SYSTEMIC Law of Supply and Demand (2014). This law is one of a whole series of systemic laws which are composed of measurable variables and therefore testable.

So, Albert’s assertion that there are no behavioral laws is true, but his generalization that there are no economic laws is false.

Conclusion: Economics is caught in the social science trap and senselessly bangs its head since more than 200 years against the glass.* To second-guess human behavior is gossip, not science.

Egmont Kakarot-Handtke


References
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2012). Geometrical Exposition of Structural Axiomatic Economics (I): Fundamentals. SSRN Working Paper Series, 2060073: 1–22. URL
Kakarot-Handtke, E. (2014). The Law of Supply and Demand: Here it is Finally. SSRN Working Paper Series, 2481840: 1–17. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

* See also ‘The existence of economic laws and the nonexistence of behavioral laws

Related 'Economists’ three-layered scientific incompetence'

Krugman and the scientific implosion of economics

Comment on Peter Radford on ‘Krugman versus Sanders’

Blog-Reference

Krugman is accused for supporting ‘political figures he likes, notably Hillary Clinton’ and attacking Bernie Sanders. What could possibly be wrong with that? Nothing, of course, except that Krugman is an economist. What is indeed wrong, is that economics is a science and as a scientist Krugman has no political mandate at all. Most people do not get the point because they have come to believe that science is just another sitcom format. And that is not wrong as far as economics is concerned.

Long before the hijacking of economics by morons, J. S. Mill, the great economist and methodologist, was well aware that there is a categorical difference between politics and science: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science ....” (Mill, 2006, p. 950)

In no uncertain terms Mill told his fellow economists: politics and science have to be separated and there is no revolving door between the two. The first thing to notice is that this message was obviously wasted on Krugman.

To speak of economics tout court is always misleading because there is political and theoretical economics and there is storytelling and something like the true theory. The crucial distinction is this:
(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. The standards are well-defined as material and formal consistency.

Theoretical economics has to be judged according to the criteria true/false and nothing else. The criteria of political economics are good/bad or like/dislike. Political economics has produced nothing of scientific value since Adam Smith.

Accordingly, Krugman has to be criticized for having made the wrong choice between political economics (= agenda pushing and storytelling) and theoretical economics (= science) and for trespassing the line between the two. He has to be criticized for being an incompetent scientist (2014) and thrown out of the scientific community.

Being out of science, Krugman can no longer be criticized for preferring one politician above the other or talking economic nonsense. After all, he then is among equals at the lowest possible intellectual level.

There is neither a political nor a moral justification for an economist to give economic policy advice without sound scientific foundation. Economists owe society the true theory, not less, not more. Krugman lacks the true theory, and with him all who subscribe to sorta-kinda maximization-and-equilibrium.

For Krugman in particular and the political sects of Walrasians, Keynesians, Marxians, Austrians and other scientific failures in general there is only one honorable option left in this election campaign: to shut up.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.

Related 'Krugman is not an economist' and 'Scientists and science actors' and 'A science without scientists'

February 21, 2016

Causa finita

Comment on Barkley Rosser and Lars Syll on ‘How could “testing axioms” be controversial?’

Blog-Reference

Barkley Rosser writes “Curiously, they [Lucas and Sargent] did not seem to care whether the assumption was actually true, because it was ‘an axiom,’ something that is assumed and cannot be tested …” (See intro)

The first methodological idiotism consisted in Lucas’/Sargent’s idea of what an axiom is; the second idiotism consisted in the rest of the profession swallowing the first idiotism hook, line and sinker.

Every half-witted economist can know from the founding fathers that an axiom is defined by its ROLE in a consistent set of propositions, a.k.a. theory: “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)

To receive a proposition for the time being without proof never meant that any green cheese assumption is acceptable as axiom.

As a rule, the proof of axioms is in the deductively derived conclusions. If what the theory says should be the case is actually the case, then the axioms are indirectly corroborated. If not, they are refuted qua modus tollens. “Whether an axiom is or is not valid can be ascertained either through direct experimentation or by verification through the result of observations, or, if such a thing is impossible, the correctness of the axiom can be judged through the indirect method of verifying the laws which proceed from the axiom by observation or experimentation. (If the axiom is deemed to be incorrect it must be modified or instead a correct axiom must be found.) (Morishima, 1984, p. 53)

All this is well-known since 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)

Not only physicists but mathematicians, too, have tested their axioms: “One of the most famous stories about Gauss depicts him measuring the angles of the great triangle formed by the mountain peaks of Hohenhagen, Inselberg, and Brocken for evidence that the geometry of space is non-Euclidean.” (Brown, 2011, p. 565)

No mathematician will ever accept the rational expectations assumption as premise of economic theory as Lucas/Sargent could have known from history: “Walras approached Poincaré for his approval. ... But Poincaré was devoutly committed to applied mathematics and did not fail to notice that utility is a nonmeasurable magnitude. ... He also wondered about the premises of Walras’s mathematics: It might be reasonable, as a first approximation, to regard men as completely self-interested, but the assumption of perfect foreknowledge ‘perhaps requires a certain reserve’.” (Porter, 1994, p. 154)

What Walras and his neoclassical followers simply never understood was that the expression ‘... perhaps requires a certain reserve’ is a code among mathematicians which translates into ‘do not bother me with your brain-dead garbage’.

So here is how to deal with economics from Walras to DSGE: “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)

To begin with, no one with an iota of scientific instinct will ever accept HC1 to HC6 as axioms. All the more so, as after the “duration of study”, that is, after more than 140 years of pointless model bricolage, even the dullest economist has now realized that this approach has failed in all methodological dimensions. The duration of acceptance of HC1 to HC6 is a simple metric for scientific incompetence.

Walrasian axioms have never been acceptable and will never be. They have to be fully replaced.*

Egmont Kakarot-Handtke


References
Brown, K. (2011). Reflections on Relativity. Raleigh, NC: Lulu.com.
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.
Porter, T. M. (1994). Rigor and Practicality: Rival Ideals of Quantification in Nineteenth-Century Economics. In P. Mirowski (Ed.), Natural Images in Economic Thought, pages 128–170. Cambridge: Cambridge 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
Westfall, R. S. (2008). Never at Rest. A Biography of Isaac Newton. Cambridge: Cambridge University Press, 17th edition.

*See 'How economics finally became a science'

February 19, 2016

Caught in secular intellectual stagnation

Comment on Jose Coronado on ‘What’s wrong with heterodox economics’

Blog-Reference and Blog-Reference on Feb 20

All thinking economists are agreed: orthodox economics is, as Keen famously put it, a naked emperor (2011), or as Quiggin put it, a zombie (2010). This is not news, the embarrassment is well advanced in years “As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

The list of defects is indeed almost endless — and exactly this is the problem. As a matter of methodological principle, the proof of one inconsistency should be enough to refute a theory. Actually, the orthodox approach is refuted by every trick in the book — yet it is still trolling around with silly model bricolage. It seems that critique and refutation are not enough to get rid of a failed approach. This, though, is also well known.

• “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)
• “If we feel misgivings ..., all we have to do is to start appropriate research. Anything else is pure filibustering.” (Schumpeter, 1994, p. 577)
• “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)
• “There is no alternative that is so obviously superior that it would justify everyone abandoning the current orthodoxy.” (Hausman, 1992, p. 255)
• “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)

Let us call this the problem of the missing alternative or nothing-to-choose dilemma. What is common to Orthodoxy and Heterodoxy is the incompetence to find a superior alternative to what is easily recognizable as a failed approach: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

The curious fact is that Keynes has already pointed the way: “For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

These premises are well-known since more than 140 years “For it would not be too much of an oversimplification to present the field as having progressed smoothly and steadily, developing theories of ever greater power and broader scope within an essentially unchanged explanatory framework, based on the concepts of optimizing individual behavior and market equilibrium, that were already central to economic thought in the previous century.” (Woodford, 1999, p. 2)

Or, in the blog-version of Krugman: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.

And here you have it! What we know with absolute certainty is that the new economic paradigm has to be free of these green cheese assumptions. So, there is no need at all to take notice of any peer reviewed article or textbook or any post which contains maximization-and-equilibrium. Economic policy proposals of marginalists can simply be laughed out of every debate.

Debunking has been wildly successful, now there is only one task left. To paraphrase the great economist and methodologist J. S. Mill: ‘Doubtless, the most effectual mode of showing how the science of Economics may be constructed, would be to construct it ...’ (2006, p. 834)*

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY, Melbourne: Cambridge University Press.
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL
Woodford, M. (1999). Revolution and Evolution in Twentieth-Century Macroeconomics. Mimeo, pages 1–32. URL

* See ‘How to restart economics’ and ‘How economics finally became a science

***

REPLY  comment on Julian Wells on Feb 21

The misapplication of statistical tools is not exactly at the core of the problem. The core is that standard economic theory is provable false. This begins with supply-demand-equilibrium. Provable means according to well-established scientific criteria.

So, a good start would be for orthodox journals to adopt a 'policy of automatic rejection' of any work that contains maximization-and-equilibrium.

Yet, one has to go one decisive step further and ask who produces this scientific garbage in the first place. And here you have it: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” (Krugman)

So, in order to make economics a science, the best start is to adopt a policy of automatic retirement of Krugman and the other sorta-kinda neoclassicals.

Economists’ perennial trouble with accounting

Comment on Steve Keen on ‘Hey Joe, banks can’t lend out reserves’

Blog-Reference

Steve Keen says: “... the useful stuff accountants know is double-entry bookkeeping. Why don’t economists know this themselves? Today’s economists simply don’t study it .... Economists of Joe’s generation often did learn accounting as undergraduates ... but very few of them ever integrated accounting concepts with their economics.”

Accounting is elementary mathematics and, true, it is regularly beyond the capacities of economists (2012). Unfortunately, also of heterodox economists. This includes Steve Keen.

The matrix is not the best tool to present the accounting interrelationships so I present my refutation of Keen’s argument in an alternative format here.

1 In the beginning, there is only the central bank which creates overdrafts and deposits uno actu out of nothing. Overdrafts stand here for all forms of direct loans to the household or the business sector. The deposits of the central bank are money and used for transactions between the household and the business sector. Other forms of money are here kept out of the picture.

2 The banking sector is now split between the central bank and commercial banks. The central bank creates 10 monetary units (million, billion, trillion, Euro, Dollar, Yuan) of overdrafts and deposits for the commercial banks only.

3 The commercial banks start their lending business and create 100 monetary units overdrafts and deposits for the business sector. The deposits of the commercial banks are the transaction money used by the business sector to pay wages and by the household sector to buy consumption goods. The ratio of central bank deposits (= reserves) to business overdrafts is here 10 %, i.e. 10/100 units) and it is assumed that this is the maximal ratio. So, the commercial banks have here reached their limit of money creation. It is the central bank’s turn to act.

4 In the course of quantitative easing, the central bank takes over 5 monetary units of business sector overdrafts (= loans) from the commercial banks. The ratio of central bank deposits to business overdrafts is now 15.8 %, i.e. 15/95. So the commercial banks have excess reserves. With regard to the 10 % limit they need 9.5 units of central bank deposits but have 15.

5 The commercial banks now again take up their lending business and increase overdrafts to business by 55 units. Of course, the same increase takes place on the debit side (= business deposits +55). The ratio of central bank deposits to business overdrafts is now again 10 %, i.e. 15/150).

In the strict sense, it is misleading to say that commercial banks lend out reserves. In a pure credit economy, the commercial banks create overdrafts and deposits uno actu out of nothing. The reserve ratio is not a practical but a legal limit.

So, literally, it is right to say that commercial banks do not lend out reserves. But it is obvious that between step 4 and step 5 the banks have excess reserves and therefore are in the position to create money in the form of bank deposits for the business and the household sector. Between step 4 and 5 the credit multiplier is indeed greater than 0. Steve Keen’s conclusion “Therefore, the $1.4 trillion of excess reserves that QE has created in the USA alone has added precisely $0 to the lending power of banks” is false.

The lending power is there but of no use, if the household and business sector prefer to deleverage (Koo, 2009).

The real problem of QE is that the central bank takes toxic loans off the commercial/ investment banks' balance sheets and thus protects them from losses.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Koo, R. C. (2009). The Holy Grail of Macroeconomics. Lessons from Japan’s Great Recession. Singapore: Wiley.

Related 'Accounting for dummies'  and 'Accounting basics' and 'End of confusion' and 'Either stupid or duplicitous' and 'Unaccountable' and cross-references Accounting

***

COMMENT on Asad Zaman and John Hermann on Feb 21

The two criteria of science are formal and material consistency (Klant, 1994, p. 31). The latter is established by empirical testing. How important this is for genuine scientists one may glean from the fact that physicists have built ‘the world’s most expensive and complex experimental facilities to date’ (CERN, Wikipedia) in order to test a hypothesis that has been put forth around 1964 by six theoretical physicists.

This vividly contrasts to the silly methodological motto of most economists, i.e. “it is better to be roughly right than precisely wrong!” (Davidson, 1984, p. 574)

The analogon to the physicists’ fervor of measurement would be to install a giant facility which records every economic transaction in real time according to the principles of accounting. This facility then delivers the exact numbers (two digits) of total income per period, consumption expenditures, saving, and so on. And these numbers are the rock-solid foundation of empirical testing.

Curiously, economists have never shown any ambition to build such a facility. Worse, economic theory is not even built upon concepts that correspond with what could be actually produced with such a gigantic bookkeeping machine. Just the contrary, economic theory has been built upon concepts like utility or equilibrium and it should have been evident from the very start that there is no testable correspondence to these green cheese concepts in the real world. Thus, the scientific failure of economics has been methodologically pre-programmed 140 years ago.

What most economists have not realized to this day is that accounting is pivotal to their discipline. Their manifest incompetence consists in not understanding the elementary mathematics that underlies accounting (2012). This is the real mathiness problem.

“Somewhere between the Political Arithmetician, alias the National Income Accountant, and the Financial Analyst, alias the Accountant, lies the task of the quantitative economist’s analytical role and none of the theoretical or applied tasks of these two pragmatic and paradigmatic figures requires anything more than arithmetic, statistics and the rules of compound interest. These, in turn, require nothing more than an understanding of the conditions under which systems of equations can and cannot be solved. But what kind of quantities do these equations encapsulate as parameters, constants, and variables? Surely, the kind of quantities that enter the equations of the Political Arithmetician and the Accountant cannot be other than rational or natural numbers — negative and non-negative? Eminent theorists, working in core areas of economic theory — price theory and monetary theory — have made this point in interesting ways over the past half a century.” (Velupillai, 2005, pp. 866-867)

To be sure, accounting is not all of economics. But make no mistake, above the entrance to economics as a science is inscribed the phrase: “Let None But Those Who Mastered The Elementary Mathematics of Accounting Enter Here.”


References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Velupillai, K. (2005). The Unreasonable Ineffectiveness of Mathematics in Economics. Cambridge Journal of Economics, 29: 849–872.

How economics finally became a science

Comment on Geoff Davies on ‘Capitalism’s growth problem’

Blog-Reference

Thank you for the link to your post ‘Finding a framework for a New Economics’ of Nov 2012. Your broad-brush description of the old and the new framework is correct. Clearly, the task of Heterodoxy is — in methodological parlance — to perform the overdue paradigm shift, that is, to move from the old to the new framework.

Therefore, the one and only question is: How is it done? Certainly NOT by wasting more time with beating the dead horses of Walrasianism, Keynesianism, Marxianism, or Austrianism. The forward-looking answer is: ‘Doubtless, the most effectual mode of showing how the Science of Economics may be constructed, would be to construct it.’ (cf. J. S. Mill).

And this is how a paradigm shift is done in the methodologically correct way.

These are the hard core propositions, a.k.a. axioms, of the Neo-Walrasian paradigm:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub, 1985)

The set of old axioms has to be fully replaced by a new set.

This methodologically correct set constitutes the new foundations of economics:
(0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(i) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(ii) O=RL output O is equal to productivity R times working hours L,
(iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimalist, that is, it cannot be reduced further, only expanded. The set contains NO nonentities like maximization or equilibrium and NO normative assertions,* and this is exactly how it should be.

The whole theoretical superstructure, which includes the evolution of the economic system in historical time, real capital formation, profit and income distribution, money, land, resources, the financial sector etcetera has to be reconstructed starting with the set (i) to (iii). This minimalist foundational set has to be consistently expanded.

This, in brief, is how the paradigm shift had to be initiated.** Walrasianism, Keynesianism, Marxianism, and Austrianism are now out for good, and with the new axiomatic foundation economics finally became a science.

Egmont Kakarot-Handtke


* For details see the AXEC-blog in particular the post ‘How to restart economics’ and the working papers on SSRN.
** For details see cross-references Paradigm shift

February 17, 2016

What heterodox economists are embarrassed to admit

Comment on Lars Syll on ‘What mainstream economists are embarrassed to admit’

Blog-Reference

Economics is practiced by four major sects Walrasians, Keynesians, Marxians, and Austrians. Strictly speaking, there is no economics with an agreed upon corpus of knowledge about the actual monetary economy. What we instead have is a heap of ill-founded opinions.

Needless to emphasize that economists who can explain everything, except how the economy works, have already answered the question ‘Why economists disagree’ (Prychitko, 1998).

Note that there is already a spin in the question. The right question is, of course ‘How to take people to task who have failed to produce anything of real scientific value over more than 200 years and are intellectually responsible for economic crises from the Great Depression onward?’

So how do economists handle the question of why, strictly speaking, economics as a science does not exist at all? “Friedman and Machlup both argued that most of the disagreement among economists is only apparent. We generally agree on theoretical fundamentals — the basic models. ... We economists disagree over applications, and that’s what the public (Machlup’s “outsiders”) hears on the evening news and reads in the financial pages. ... For Friedman, their differences is over politics, not economic theory. The conflation of solid economic theory with political (and moral) judgment helps explain a good deal of the apparent disagreement among economists ....” (Prychitko, 1998, pp. 1-2)

It is only apparent, dear outsiders and laypeople. In reality, Hey presto!, Walrasians, Keynesians, Marxians, and Austrians subscribe to the same theoretical fundamentals.

Does anybody remember the vital distinction between normative and positive (= empirical) and that science restricts itself to the latter? What did J. S. Mill tell you, dear economists of all stripes?

“Mill had grasped clearly in the Logic the distinction between positive and normative propositions, writing that: ‘a scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision’.” (Whitaker, 1975, p. 1047)

In brief: Politics is not your business at all. Your proper business is to figure out how the economy works. Society does not need your unfounded opinion, dear economists, because we have already enough of this garbage, what we really need is rock-solid knowledge.

Of course, economists have nothing to offer that comes close to a valid scientific theory. And here is where the political smokescreen is applied. By declaring an issue as political/normative it becomes insoluble because there is no way to solve a normative problem scientifically, i.e. by applying the criteria of logical and material consistency.

This is the Houdini trick of political economists: When they cannot solve a positive problem, e.g. unemployment, they redefine it as a normative problem, well knowing that everybody accepts that normative questions are insoluble in principle. The ensuing endless blather hides the fact that political economists lack the true 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, 1991, p. 30)

The first task of Heterodoxy is to establish scientific standards in economics. That means to obviate all questions that fall outside the scientific framework of true/false, and that in turn means to get out of political economics.

Political economics has not produced anything of scientific value since Adam Smith. This is what orthodox economists are embarrassed to admit. Heterodoxy, on the other hand, has failed so far to produce a superior alternative.

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

To this day neither Orthodoxy nor Heterodoxy has any clue of what it might mean.

The plain fact behind the political smokescreen is that economics is a failed science. The one thing Walrasians, Keynesians, Marxians, and Austrians have indeed in common is scientific incompetence. It is absolutely irrelevant whether an orthodox or a heterodox economist admits this or not.

Egmont Kakarot-Handtke


References
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Prychitko, D. L. (1998). Introduction. In D. L. Prychitko (Ed.), Why Economists Disagree: An Introduction to the Alternative Schools of Thought, pages 1–16. Albany, NY: State University of New York Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Whitaker, J. K. (1975). John Stuart Mill’s Methodology. Chicago Journals, 83(5): 1033–1050. URL

Immediately preceding post 'Political economics: a playground for scientific deadbeats'

Related 'Economists’ three-layered scientific incompetence' and 'Heterodoxy and the nullity of dead horse beating' and 'How to restart economics' and 'Every thinking economist is heterodox by default, but how do we proceed from here?' and 'Heterodoxy, too, is scientific junk'

February 16, 2016

Economics, too, has been almost ruined by the bigots of common sense

Comment on ‘”Observation is theory-laden” — fashionable philosophical rubbish’

Blog-Reference

It is helpful to distinguish first between naive empiricism/spontaneous perception and observation. Ultimately, the naive empiricists are the worst nuisance in science. To recall, Galileo argued that the earth moves with high speed. Now, this was big fun for the half-witted empiricists and they told Galileo that they could feel nothing of a motion and asked him mockingly why their hats did not fly away.

Of course, Galileo could explain the optical illusion of the empiricists with the theory of relative motion but this was complicated/anti-intuitive and spontaneous experience was brain-dead simple. So, Galileo was unconvincing in the court of public opinion. Naive empiricism plays always in the hands of the stupid majority or the bigots of common sense as J. S. Mill called them.

“People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.” (2006, p. 783)

Naive empiricism relies on the five senses. But the phenomenon of optical illusion shows that perception does not yield a one-to-one correspondence with reality. We know that the railway track never converges but we can clearly see it.

Theory can therefore be taken as a kind of third eye which helps to see the ‘real’ reality. Observation, then, is theory-laden perception which overrides spontaneous perception.

“I shall never be able to express strongly enough my admiration for the greatness of mind of these men who conceived this [heliocentric] hypothesis and held it to be true. In violent opposition to the evidence of their own senses and by sheer force of intellect, they preferred what reason told them to that which sense experience plainly showed them ... I repeat, there is no limit to my astonishment when I reflect how Aristarchus and Copernicus were able to let conquer sense, and in defiance of sense make reason the mistress of their belief.” (Galileo, quoted in Popper, 1994, p. 84)

Just because science is anti-intuitive the main problem is how to prove propositions that are directly against the personal experience of any dull bigot of common sense. Theory is a product of imagination and NOT of the five senses.

“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?” (Einstein, 1934, p. 167)

We find the correct way by contionous theory-laden observation. Alan Musgrave, of course, has never found anything of scientific value because he is fully occupied with spreading methodological rubbish.

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

***

REPLY  comment on Lars Syll on Feb 16

You say “I do not understand what you are heading at.” I think this is pretty obvious.

Economics is a failed science. Part of the problem is that economists violate well-defined scientific standards on a daily basis: “If one takes seriously what Popper says about falsifiability and the critical attitude, then the methodological practice of economics is not only mistaken, it is stupid and intellectually reprehensible.” (Hausman, 1992, p. 275)

The incompetence of economists is only surpassed by the incompetence of economic methodologists. A methodologist who does not immediately see that equilibrium is a petitio principii and that microeconomics is one big fallacy of composition and therefore methodologically forever unacceptable is either blind, stupid, or gutless.

Instinctively, in order to secure their ecological niche, economic methodologists have pulled out their own teeth, watered down methodological standards, advocated eclecticism/ pluralism, and applauded to ‘tennis with the net down’ (Blaug): “The current state of mainstream economic methodology in general, therefore, reflects a polarisation of positions on the role of methodology: the ‘old guard’ traditionalists continue to see methodology’s role as being prescriptive of good scientific practice; the ‘new guard’ deny that role and concentrate on using the methodological perspective as a means of describing the methodology implicit in economic theorising.” (Dow, 1997, p. 80)

Instead of enforcing the well-defined rules of logical and empirical consistency methodologists turned to description and storytelling: “Much of the work in methodology over the last ten years has thus consisted of methodological analysis of what economists do and how they argue.” (Dow, 1997, p. 78)

This is how the policemen of science evaded the hard part of their job and made a peep-show of methodology. The ‘new guard’ of methodologists deserves only contempt for bringing down methodology to senseless wish-wash about induction, deduction, and abduction. Alan Musgrave’s piece is substandard in the already substandard discipline of economic methodology.

What I am heading at is that heterodox economists get the ‘new guard’ of methodologists off their back.


References
Dow, S. C. (1997). Mainstream Economic Methodology. Cambridge Journal of Economics, 21: 73–93.
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.

Related 'Axiomatized nonentities and the failure of methodologists'

February 15, 2016

Political economics: a playground for scientific deadbeats

Comment on Lars Syll on ‘What mainstream economists are embarrassed to admit’

Blog-Reference

It is of utmost importance to distinguish between political and theoretical economics. The main differences are: (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.

Theoretical economics has to be judged according to the criteria true/false and nothing else. The history of political economics, on the other hand, can be summarized as the perpetual violation of well-defined and crystal-clear scientific standards.

The fact of the matter is that theoretical economics has from the very beginning been hijacked by the agenda pushers of political economics. Smith and Mill fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

Political economists of all stripes are characterized by four common traits:
(i) They are mainly occupied with sociology, psychology, anthropology, political science, history, etcetera. That is, they miss the essentials of economics proper.#1
(ii) They use theoretical economics as a means/support for their agenda. By this, they abuse science unknowingly or knowingly.
(iii) As far as they have tried to underpin their agenda theoretically it can be rigorously demonstrated in each case that their approaches lack formal and material consistency.#2
(iv) They have no idea about how the actual economy works.#3

It is not decisive what the political agenda is: ALL of political economics is worthless cargo cult science.

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

Political economics has NOT produced anything of real scientific value since Adam Smith. After more than 200 years of dilettantism and failure there is no place for the political economists of Walrasianism, Keynesianism, Marxianism, and Austrianism in the scientific community.

Egmont Kakarot-Handtke


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

#1 See ‘Economists’ three-layered scientific incompetence
#2 See ‘On economists’ stupidity
#3 See ‘How the intelligent non-economist can refute every economist hands down


Related 'Scientists and science actors' and 'Scientific suicide in the revolving door'. For details of the bigger picture see cross-references Political Economics and cross-references Incompetence.

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REPLY  comment on Ken Zimmerman on Feb 16

You ask ‘How do the “intelligent non-economists” explain profit? What meanings do they attach to profit?’

This is the wrong question. The right question is ‘How do people who call themselves economists explain profit?’ And the answer is that neither Walrasians, nor Keynesians, nor Marxians, nor Austrians can explain what profit is. And this is a rather bad situation because if one does not know what profit is one cannot understand how the market economy works. And then one only produces peer reviewed garbage and talks nonsense on blogs.

My post ‘How the intelligent non-economist can refute every economist hands down’#1 enables the general public to readily debunk incompetent economists. This is the precondition to get them out of positions where they have a lever to wreck greater havoc.#2

#1 See here
#2 See for example ‘Free the academy from economics’ and ‘Economists are a menace to their fellow citizens

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REPLY  comment on Ken Zimmerman on Feb 17

You say ‘I have a slightly different take on profit.’ From the rest of your post it is pretty obvious that you have no idea of profit at all.

Profit for the economy as a whole is not a subjective concept but an objectively measurable variable. So it is irrelevant what the individual agent knows or opines about it.

For a physicist who thinks about gravity it is irrelevant what the man who falls from a skyscraper thinks about gravity. The physicist is after the Law of Falling Bodies.

Likewise for the economist who thinks about profit. He is after the Profit Law.

From the fact that your take on profit is subjective instead of objective follows immediately that you have not grasped the basics of scientific methodology.

Here is the Profit Law. It is testable and you or somebody who is more competent can try to empirically refute it. It should be evident that waffling about profit or second-guessing agents has not yielded any worthwhile results in the last 200+ years.

Immediately following post 'What heterodox economists are embarrassed to admit'

February 14, 2016

Success is the best method

Comment on ‘Why science necessarily involves a logical fallacy’

Blog-Reference and Blog-Reference on Feb 15, context adapted

When economists, who after more than 200 years have not figured out what exactly the difference between profit and income is, talk about science and logic things become a bit surreal.

One outstanding characteristic of Heterodoxy in particular is that deductivism or the axiomatic-deductive method is abhorred. Consequently, other methods are proposed. One among others is abduction.

This, to be sure, is perfectly legitimate. The question is this: if the abductive method is indeed superior, why not apply it and present concrete results? Success is the best argument. To recall, it were the discoveries of Galileo, Newton or Einstein which cemented the reputation of the axiomatic-deductive method. This method sums up the personal experience of genuine scientists and postulates the primacy of theory over naive empiricism: “This indicates that any attempt logically to derive the basic concepts and laws of mechanics from the ultimate data of experience is doomed to failure.” (Einstein, 1934, p. 166)

It is a remarkable coincidence that Einstein deduced gravity waves from his theory in 1916 and in our days, 100 years later, they are observed. This success is a fine specimen for the primacy of theory and a smashing refutation of naive empiricism.

In marked contrast, abduction postulates the primacy of empiricism: “In inference to the best explanation we start with a body of (purported) data/facts/evidence and search for explanations that can account for these data/facts/evidence.” (See intro)

Now, the fundamental problem is that this may even work satisfactorily on a small scale, but the subject matter of economics is the economy, or more precisely, the world economy. Clearly, the world economy as such cannot be seen or experienced, so there is no other way than to start with a theoretical picture as a first approximation. And this is exactly what Popper has said “And in the social sciences it is even more obvious than in the natural sciences that we cannot see and observe our objects before we have thought about them. For most of the objects of social science, if not all of them, are abstract objects; they are theoretical constructions.” (1960, p. 135)

Here again we have the primacy of theory. Popper, of course, was not the first to realize this, he got it from an economist: “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’." (Mill, 1874, V.55)

Like nothing else, ‘abstract speculation’ puts the heterodox economist’s teeth on edge. The horror association is the absolutely vacuous formal exercise of general equilibrium theory. This green cheese nonentity, though, is clearly NOT what Mill had in mind when he spoke of ‘abstract speculation’. For him facts had always the last word “The ground of confidence in any concrete deductive science is not the à priori reasoning itself, but the accordance between its results and those of observation à posteriori.” (Mill, 2006, p. 896-897)

The axiomatic-deductive method implies that the ultimate criterion for the assessment of a theory is empirical proof/refutation. The methodological blunder of standard economics has never been ‘abstract speculation’ but ‘empirically vacuous speculation’ of the type how-many-angels-can-dance-on-a-pinpoint.

The axiomatic-deductive method was never meant to be a fact-free logical exercise. It was Debreu who pushed it down this blind alley. It is fully justified to reject Debreu’s misapplication, but this gives one no good reason to relinquish the method.

So there is no real need to invent a new method for economics. The scientific method is well-defined and applies here as well “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant, 1994, p. 31)

Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

Economics never rose above logically and empirically inconsistent speculation and storytelling.

Egmont Kakarot-Handtke


References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
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
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
Popper, K. R. (1960). The Poverty of Historicism. London, Henley: Routledge and Kegan Paul.

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COMMENT on Geoff Davies on Feb 18

As the great economist and methodologist J. S. Mill already knew: Doubtless, the most effectual mode of showing how the Science of Economics may be constructed, would be to construct it.

The paradigm shift has already taken off.* You missed it.

* For an overview see cross-references.

February 13, 2016

The still unfinished Keynes

Comment on ‘The most important book in the history of economics’

Blog-Reference

It is trivial but worth repeating: political economics and theoretical economics are different things and have to be strictly kept apart. The core problem of economics as a science is, of course, that by its very nature it is closely entangled with politics. The biggest threat to theoretical economics is that it gets hijacked by those with a political agenda. It does not matter whether this agenda is good or bad in current public opinion. Science is committed to its own criteria or it ceases to be science.

But are we not all inescapably involved in the struggle between good and bad-evil? Politics, religion, and philosophy say so and urge everybody to take side. But even if this were true, it cannot serve as a justification to hijack science or to let it be hijacked. What has to be recognized is that science is about true/false and not about good/bad-evil. This distinction is part of the demarcation problem, which is the fundamental problem of methodology (Popper, 1980, p. 34).

Keynes had a political agenda, and this was his first priority. Let us agree for the moment that his attempt to alleviate unemployment was good and right without any qualification. Hence we all can accept Keynes’s agenda — except for one point: Keynes used theoretical economics for political purposes. This is unacceptable according to science’s own ethics which was well understood in J. S. Mill’s days.

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

Having taken politics out of the way, the next question is about the scientific content of the General Theory. Here we can — in very general terms — side with Allais: “... mais son [Keynes’s] insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” (1993, p. 70) In other words, Keynes saw the problems but could not solve them due to a lack of logical consequence.

“For, if anything, Keynes was the most intuitive of men.” (Moggridge, 1976, p. 33)

“It is well known that John Maynard was born anew every morning; for this reason, his colleagues at Bretton Woods commented that he was too intelligent to be consistent.” (Valentino, 1988, p. 239)

“But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281)

In more specific terms we can definitively declare that the formal foundations of Keynesianism are logically defective since the General Theory. Keynes's fundamental equations of macroeconomics, i.e. Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment, are indefensible. That is why Keynesianism is a failure.

The deeper reason is that Keynes — just like his predecessors and fellows — did not come to grips with profit.

“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 et al., 2010, pp. 12-13, 16)

It is no contradiction to acknowledge that Keynes was one of the good guys of political economics and not to accept the General Theory as a noteworthy contribution to theoretical economics. Good intentions are not a scientific criterion, only material and formal consistency count. So what is left?

Keynes’s economic policy ideas were not exactly innovative. “Public works to relieve the unemployed is an idea as old as the Bible; ...” (Blaug, 1998, p. 662)

Surprisingly, Keynes’s lasting scientific contribution relates to methodology. He spoke it out loud, so that every fellow economist could hear it: Throw over the classical axioms and put theoretical economics on new foundations. What else could Keynesian Revolution mean than a paradigm shift? Keynes pointed the way out of the morass but did not follow it himself. Neither did the Post-Keynesians.

When a logically feeble economist like Krugman, who has not realized until this day that IS-LM is defective (2014) and that maximization-and-equilibrium is axiomatically inadmissible, eulogizes his ill-understood reference as ‘The most important book in the history of economics’ then you know for sure that economics is scientifically at the bottom of the barrel.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
Moggridge, D. E. (1976). Keynes. London, Basingstoke: Macmillan.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
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
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, pages 238–249. Cambridge, New York, NY, etc.: Cambridge University Press.