November 30, 2016

Rethinking the multiplier

Comment on Mark Thoma on ‘Infrastructure, jobs and wages: It’s not so simple’

Blog-Reference

Standard economics is known to be axiomatically false. This implies that the familiar theory of the multiplier is also false. This in turn means that economic policy proposals have no sound scientific foundation.

This is rather bad because “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)

Economists have no true theory but only different opinions. What has been fateful already in the Great Depression is that economists lack the true employment theory since 200+ years. So unemployment is in the last instance the result of economists’ scientific incompetence.

To make a comprehensive analysis short#1 the basic version of the objective structural employment equation is shown on Wikimedia.

From this equation follows the correct multiplier. Keynes’s arguments about the role of aggregate demand have been commonsensically right but formally defective. More precisely, the Keynesian standard multiplier is provable false since 80 years.

Egmont Kakarot-Handtke

#1 See ‘The very serious blunders of very serious people

November 29, 2016

Economics and corruption

Comment on Paul Krugman on ‘Why Corruption Matters’

Blog-Reference

A country’s order is defined by the interplay of its institutions. Lucky the country that has a well-designed architecture of public/private institutions which individually function as intended and codified in their mission statement.

One of the fundamental principles of institution building is strict separation, for instance: separation of state and church, party and state, executive and legislative, state and economy, politics and science, etcetera.

When Krugman criticizes the lack of separation between Mr. Trump’s presidency and his private business he is in a rather awkward position. Krugman has been and still is a major participant in the deconstruction of the firewall between politics and science, or more specifically, between politics and economics.#1, #2

What the general public does not realize is that there is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never really got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing).

Economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory and axiomatically false. Economics is NOT a science and because of this the claim as expressed in the title ‘Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel’ is false.

The Bank of Sweden is, of course, entitled to award prizes but is in NO position to upgrade a cargo cult science to a science. Actually, the Bank is misleading the general public about the dismal state of economics. Whether unintentionally or intentionally is a matter of indifference. What counts is the effect on the general public.

Political economics has produced nothing of scientific value in the last 200+ years. This carries over to politics: “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)

Economists do NOT have the true theory. Because of this, economic policy guidance never had sound scientific foundations. And it does not matter at all whether this guidance has been more rightist or more leftist, more conservative or liberal, more Rep or Dem. ALL political economists are fake scientists.

Let’s face it, Krugman has violated and still violates the separation of sience and politics, which is vital for the integrity of science, that is, he practices illegitimately in economics what he legitimately criticizes in politics.#3

Egmont Kakarot-Handtke

#1 ‘Scientific suicide in the revolving door
#2 ‘Krugman is not an economist
#3 ‘Economists: the Trumps of science

Related 'FakeNews, FakeScience: economics in the information age' and 'Economics: a science without scientists' and 'Turning the bananatization of economics around' and 'It's about institution-building, stupid' and 'Economics is not post-truth but pre-truth'

November 28, 2016

How to end the Punch and Judy show about profit

Comment on Fred Moseley and Peter Dorman on ‘It’s Red Friday and Time to Discuss the Role of Exploitation in Profit’

Blog-Reference

The profit theory is false since Adam Smith.#1 Economists have NO idea of the pivotal magnitude of their subject matter. This includes the four main sects Walrasianism, Keynesianism, Marxianism, Austrianism and, of course, Fred Moseley and Peter Dorman.

There are three things that are intertwined but have to be analytically kept apart: (i) Theory of Value, (ii) Theory of Profit for the economy as a WHOLE, (iii) DISTRIBUTION of overall profit between sub-sectors (production, banking, land use, etc.) and individual firms.

The Law of Value says that relative prices in the pure consumption economy are inverse to the productivities.#2 This Law replaces the Labour Theory of Value.

The Profit Law for the pure consumption economy says that OVERALL profit depends on the expenditure ratio and the distributed profit ratio.#3

It holds in particular:
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit maximizing behavior. These subjective factors are irrelevant, profit for the economy as a whole is OBJECTIVELY determined.#4
• In order that profit comes into existence for the first time in the pure consumption economy the household sector must run a deficit at least in one period.
• Profit is, in the simplest case, determined by the increase and decrease of household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole.
• Wage income is the factor remuneration of labor input. Profit is NOT a factor income. Since capital is nonexistent in the pure consumption economy profit is not functionally attributable to capital.
• There is no relation at all between profit, capital, marginal or average productivity. Proudhon’s increasing returns theory of profit is plain rubbish.#5
• Profit has NO real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart.
• The existence and magnitude of overall profit does not depend on the ownership of the firms that comprise the business sector. The Profit Law is the SAME in capitalism and communism.
• The value of output is, in the general case, DIFFERENT from the sum of factor incomes. This is the defining property of the monetary economy.
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.#6
• There is NO antagonism between total wages and total profits, and the distribution of consumption good output has nothing at all to do with profit.
• Innovation and efficiency are IRRELEVANT for the profit of the business sector as a WHOLE. It is a FALLACY OF COMPOSITION to trivially generalize what can be observed in an individual firm.

The classical/neoclassical and Keynesian/Post-Keynesian theories of value/profit are provable false or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”#7 Time for Fred Moseley and Peter Dorman to end this HiFred-HiPeter Punch and Judy show.

Egmont Kakarot-Handtke

#1 ‘The Profit Theory is False Since Adam Smith
#2 ‘The Pure Logic of Value, Profit, Interest
#3 ‘Essentials of Constructive Heterodoxy: Profit
#4 See the Profit Law for the pure consumption economy on Wikimedia
#5 See ‘Increasing Returns and Stability
#6 See also ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#7 See overview ‘One way to get it right, many ways to get it wrong

Immediately preceding 'The thing with profit and exploitation'

November 26, 2016

The thing with profit and exploitation

Comment on Peter Dorman on ‘It’s Red Friday and Time to Discuss the Role of Exploitation in Profit’

Blog-Reference and Blog-Reference on Nov 28

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

This perhaps surprises the general public: economists do not know until this day what profit is. By consequence, they have NO idea about how the monetary economy works. More specifically, economics consists of four main approaches, Walrasianism, Keynesianism, Marxianism, Austrianism, and NONE of them gets profit right.#1

As a consequence, economic policy guidance never had sound scientific foundations. Because economists never captured the essence of the market economy, whatever they have said for or against capitalism, communism or socialism has been based upon provable false theories about how the monetary economy works.

Since Ricardo and Marx, both orthodox and heterodox economists believe that there is a fundamental antagonism between the firm’s owners (= capitalists) and the employees/workers.

The idea that an antagonism between classes is built into the economic system, though, rests on an optical illusion. And this optical illusion ultimately derives from the theory of the firm. It is obviously true that an individual firm can increase profit by lowering the wage rate. But this is NOT true for the economy as a whole. To generalize what is true for an isolated part of a system is known in methodology as FALLACY OF COMPOSITION.

In the most elementary case, the interdependencies of the economic system have the unintended effect that if firm A makes a profit by lowering the wage rate, firm B (= the rest of the economy) makes a loss under the initial macroeconomic condition that total consumption expenditure is equal to total wage income.#2 And, by the same token, the real wage of the workers of firm A decreases and that of the workers of firm B increases. So, what happens is that a redistribution of profit between firms and a redistribution of output between households takes place.

In political terms this means that there are NO CLASSES with a common interest. Put differently, what appears as exploitation of the workers of firm A is only part of the complete picture of a REDISTRIBUTION of profits WITHIN the business sector and a REDISTRIBUTION of output WITHIN the household sector. In other words: the exploitation of workers in firm A benefits the workers in firm B. And the profit increase of firm A’s capitalists comes from firm B’s capitalists. Taken all capitalists together their profit does not change. Taken all workers together their real share of output does not change.

Conclusion: the naive concept of exploitation has to be replaced by the concept of cross-over exploitation.

Economists are supposed to be experts on the economy. So it is quite natural to think that they know how the profit mechanism works; after all, this is the pivotal phenomenon of their subject matter. Yet, this is definitely not the case. Economists are incompetent scientists and, after 200+ years, they are still stuck in the fallacy of composition. So, economists have NOTHING to contribute to the discussion about how the economy, markets and firms should be organized.

Economists have discussed the role of exploitation and profit without ever coming to the core of the matter. It is Red Friday and time for them to retire now for good.

Egmont Kakarot-Handtke

#1 ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down
The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
Profit for Marxists
#2 ‘Essentials of Constructive Heterodoxy: Profit

Immediately following 'How to end the Punch and Judy show about profit'

***
REPLY to Tom Hickey on Nov 27

There are three things that are intertwined but have to be analytically kept apart: (i) Theory of Value, (ii) Theory of Profit for the economy as a whole, (iii) Distribution of overall profit between sub-sectors (production, banking, land use, etc.) and individual firms.

The Law of Value says that relative prices are inverse to the productivities.#1 This Law replaces the Labour Theory of Value.

The Profit Law for the pure consumption economy says that OVERALL profit depends on the expenditure ratio and the distributed profit ratio.#2

It holds in particular:
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit maximizing behavior.
• In order that profit comes into existence for the first time in the pure consumption economy the household sector must run a deficit at least in one period.
• Profit is, in the simplest case, determined by the increase and decrease of household sector’s debt. There is a close relation between profit/loss and the expansion/contraction of credit for the economy as a whole.
• Wage income is the factor remuneration of labor input. Profit is not a factor income. Since capital is nonexistent in the pure consumption economy profit is not functionally attributable to capital.
• There is no relation at all between profit, capital, marginal or average productivity.
• Profit has no real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart.
• The existence and magnitude of overall profit does not depend on the ownership of the firms that comprise the business sector.
• The value of output is, in the general case, different from the sum of factor incomes. This is the defining property of the monetary economy.
• Profit is a factor-independent residual and qualitatively different from wage income. Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.#3
• There is no antagonism between total wages and total profits, and the distribution of consumption good output has nothing at all to do with profit.
• Innovation and efficiency are irrelevant for the profit of the business sector as a WHOLE. It is a FALLACY OF COMPOSITION to trivially generalize what can be observed in an individual firm.

In sum: The classical/neoclassical and Keynesian/Post-Keynesian Theories of Value/Profit are provable false.

#1 ‘The Pure Logic of Value, Profit, Interest
#2 ‘Essentials of Constructive Heterodoxy: Profit
#3 See also ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

***
COMMENT on Andrew Anderson on Nov 28

You say: “A very interesting thing to me is that in the Bible profit is good but profit taking ISN’T(!) good ...”

It is common knowledge that the Bible belongs to the sphere of religion/belief/storytelling and that economics belongs to the sphere of science/knowledge/proof.

Both spheres do not mix, never have, never will. Your post is out of place.

***
REPLY to jrbarch on Nov 29

It is common knowledge that content and level of economic discussion is far below zero. There is NO need for you or anybody else to deliver more examples.

For details see ‘FakeNews, FakeScience: economics in the information age

***
REPLY to jrbarch on Nov 30

You say: “I do have an issue with ‘trust me, I’m a scientist’.”

There is NO issue at all, there is only your abysmal ignorance and confusion. Science is NOT about trust or credibility or belief or authority, but only about proof, more specifically, about the logical and empirical consistency of a theory. A theory in turn is the best humanly possible mental representation of reality.

Since the ancient Greeks introduced the distinction between opinion (= doxa) and knowledge (= episteme) NO scientist has ever said believe me. As Popper put it: “... a critical discussion is well-conducted if it is entirely devoted to one aim: to find a flaw in the claim that a certain theory presents a solution to a certain problem.”

So, there is NO issue at all. I have given you the Profit Law and if you have qualms with it you are invited to refute it. Of course, you cannot. But you can endlessly waffle about Love, the Divine, your Australian aboriginal brothers and all the other good vibration stuff.

Here is the ultimate test to practically find out the difference between doxa and episteme for yourself: You have the choice to board an aircraft that has been designed/constructed by your good vibration folks and one that has been designed/constructed by scientists/ engineers. Whom do you REALLY trust?

OK, and now get out of economics.

Meta references

FakeNews, FakeScience: economics in the information age

Comment on Mark Thoma on ‘Today’s Economic Political Winds Could Turn Into Tomorrow’s Tornado’#1

Blog-Reference

Economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory and axiomatically false. Economics is NOT a science and because of this the claim as expressed in the title ‘Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel’ is false.

The Bank of Sweden is, of course, entitled to award prizes but is in NO position to upgrade a cargo cult science to a science. Actually, the Bank is misleading the general public about the dismal state of economics. Whether unintentionally or intentionally is a matter of indifference. What counts is the effect on the general public.

What the public has to be aware of is that there is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never really got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing).#2 And this is how economics became a FakeScience.

This carries over to politics: “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)

Economists do NOT have the true theory. Because of this, economic policy guidance never had sound scientific foundations. And it does not matter at all whether this guidance has been more rightist or more leftist. ALL political economists are FakeScientists.

The fact of the matter is that economists do not know how the actual economy works.#3 They do not even understand the foundational concepts of their subject matter, viz. profit and income.#4 What is communicated in the economics curriculum has no valid scientific content.#5

Increasingly, economic debates takes place on dedicated blogs. Needless to emphasize that the debates should satisfy scientific standards: first of all, open access, objective/informed argumentation, commitment to material and logical consistency, no political agenda pushing, no false information, no white noise, no sitcom stuff and, most importantly, no censorship by the blog owner.

At present, are economics blogs strictly dedicated to scientific discourse or are they abused for agenda pushing? No surprise here: because Walrasianism, Keynesianism, Marxianism, Austrianism are FakeScience what happens on the economics blogs is mainly FakeDiscourse.#6, #7

As far as economics is concerned, the information age has not so much increased the dissemination of scientific knowledge but rather the spreading and spinning of opinion. Time for theoretical economics (= science) to execute the clear-cut separation from political economics (= agenda pushing) and to do the qualitative leap from the current disinformation phase to the often advertised information age.

Egmont Kakarot-Handtke

#1 The Fiscal Times
#2 See also ‘Scientific suicide in the revolving door
#3 See also ‘There is NO such thing as an economic expert
#4 See ‘Profit and the collective failure of economists
#5 See ‘The father of modern economics and his imbecile kids
#6 A random selection of blogs that block/delete contributions: Economists View, EconoSpeak, Uneasy Money, Billy blog, Worthwhile Canadian Initiative, Naked Keynesianism, Critical Macro Finance, Real-World Economics Review blog, Lars P. Syll blog ...
#7 See also ‘Wikipedia and the promotion of economists’ idiotism

***
ADDENDUM on Dec 30

Note on the Link to ‘Fake Academe, Looking Much Like the Real Thing’ NYT Dec 29

An economics blog is definitely the wrong place to alert people about fake academe. Economics is a fake science since Adam Smith. For details see ‘FakeNews, FakeScience: economics in the information age’ and ‘The real problem with the economics Nobel

November 24, 2016

Who or what exactly did Keynes save?

Comment on Asad Zaman on ‘Methodology for (Re)-Reading Keynes’

Blog-Reference

Asad Zaman says: “It is always useful to absorb the insights of our predecessors, before trying to build upon them. Such a methodology is essential for the advancement, progress and accumulation of knowledge. Our current stock of human knowledge is based on the collected insights and labors of hundreds of thousands of scholars, accumulated over the centuries. We would return to the stone ages if we were to reject it as being full of contradictions and errors (which it is). Instead, progress occurs by absorbing the past accumulated wisdom, and trying to remove the errors, or add missing insights, building on our heritage, rather than discarding it and starting over from scratch.” (See intro)

Asad Zaman’s complete lack of logic is again and again astounding. The fact that he is in charge of the WEA curriculum is a sure indicator of the imminent intellectual demise of RWER-Heterodoxy.

Imagine for one moment the famous dialogue between Galileo and Simplicio. Galileo, of course, refutes the geo-centric theory which prevailed about 1500 years and Simplicio argues (in Asad Zaman’s words) “We would return to the stone ages if we were to reject it as being full of contradictions and errors (which it is).” We know today that Galileo’s rejection of 1500 years of orthodox astronomy did NOT lead to the stone age but to modernity.

Asad Zaman obviously does not understand the concept of paradigm shift. He argues: “Our current stock of human knowledge is based on the collected insights and labors of hundreds of thousands of scholars, accumulated over the centuries.” This is true for the genuine sciences but NOT for economics because economics is a failed science like Ptolemaic astronomy.

It is remarkable for a heterodox economist to defend “our heritage” because to do the paradigm shift, to replace the obsolete Orthodoxy, to discard the worthless heritage, has always been the mission and raison d’être of Heterodoxy. As Joan Robinson put it: “Scrap the lot and start again.”#1

With regard to the current stock of economic knowledge it has often been observed: “Thousands upon thousands of scholars, as well as thousands of statesmen and men of affairs, have contributed their efforts to the attempt to understand the course of events of the economic world. And today this field of investigation is being cultivated more extensively, than ever before. How is it, then, that in all these years, and with all the undoubted talent that has been lavished upon it, the subject of economics has advanced so little?” (Schoeffler)

In order to understand the failure of economics in general and Keynesianism in particular one has first of all to realize that there is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing).

Keynes was first and foremost a political economist. Theoretical economics was a means to his political ends. Yet, it holds: “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)

Keynes never had the true theory but many fast changing opinions. Keynesianism has never been more than educated common sense.

Keynes’s approach has already been dead in the cradle. He defined the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is defective because Keynes never came 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.)

Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of Keynesian macroeconomics falls apart.#2

But things are even worse. Because economists in general and Keynesians in particular do not understand profit they do not understand what deficit spending really means: “When government is added to the pure consumption economy then it holds under the condition of zero investment of the business sector and zero saving of the household sector Qm=G-T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus.”#3 In simple terms: government deficit = business profit. This is, in a nutshell, the current business model of the United States.

We cannot read Keynes’s mind and cannot know whether he wanted to save workers from unemployment, or whether he wanted to save Great Britain from decline, or whether he wanted to save Europe from another war, or whether he wanted to save capitalism from secular stagnation. Whatever Keynes intended is irrelevant. Because he did not understand the elementary economic relationship between deficit and profit, he de facto initiated the greatest profit boost in the history of humankind.#4 The actual distributional problems Post Keynesians so often point their fingers on are ultimately the handiwork of Keynes.

The absurdity of political economics consists in the fact that Keynes has always been praised from the left wing of the political spectrum and condemned from the right wing. Which proves that the one thing that is equally distributed among economists is idiocy. Nobody has done more for the one-percenters than Keynes.

Economics will not become a science before the present generation of Walrasians, Keynesians, Marxians, Austrians has been retired.

Egmont Kakarot-Handtke

#1 See ‘From false micro to true macro: the new economic paradigm
#2 For details of the big picture see cross-references Keynesianism
#3 See ‘Wikipedia and the promotion of economists’ idiotism
#4 See ‘Keynesianism as ultimate profit machine

Related 'Economists: the Trumps of science' and 'The economist as standup comedian' and 'Keynes’s message for contemporaries' and 'How Keynes got macro wrong and Allais got it right' and 'The economic machine is broken? Don’t call the heterodox repairman!'

November 23, 2016

Economics for philosophers

Comment on David Ruccio on ‘Richard Rorty, postmodernism, and Trump’

Blog-Reference

Currently, economists are in the mode of conspicuous self-critique: Yes, we have done too much math, yes, our reduction of multi-dimensional homo sapiens to one-dimensional homo oeconomicus has been rather one-sided, yes, the Chicago free market philosophy has gone over the top, yes, there has been too much abstract model building and too little empirics, yes, something has gone badly wrong with the distribution of income and wealth, yes, free trade is not the summum bonum. Paul Romer even characterized macroeconomics as a math-obsessed pseudoscience.#1

This is rather spooky because economists normally do not admit failure but simply explain it away. They have even convinced the general public that the worst social catastrophe in history, the Great Depression, had nothing to do with their abysmally crappy economic theory and policy guidance but that it was all the FED’s fault.

The question is, what is going on in economics?

As it happens, philosophers ― the specialists for making sense of everything in this universe and all parallel universes ― have conveniently come up with an explanation. It carries the label postmodernism: “Me, I think Rorty should remain on our reading lists, if only because postmodernism has been blamed ... for a wide range of recent disasters, from 9/11 to Donald Trump.” (See intro)

How did postmodernism achieve such a breathtaking overdose of disasters?

“This equaling out of truth and falsehood is both informed by and takes advantage of an all-permeating late post-modernism and relativism, which has trickled down over the past thirty years from academia to the media and then everywhere else. This school of thought has taken Nietzsche’s maxim, there are no facts, only interpretations, to mean that every version of events is just another narrative, where lies can be excused as ‘an alternative point of view’ or ‘an opinion’, because ‘it’s all relative’ and ‘everyone has their own truth’ (and on the internet they really do).”#2

Does anyone remember among these half-witted philosophers that the ancient Greeks started science with the distinction between doxa (= opinion) and episteme (= knowledge)? And that scientific knowledge is well-defined as material and formal consistency. And that Aristotle was quite clear about how science works: “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.” (Wikipedia, Posterior Analytics)

The fact of the matter is that economics has not been undermined by postmodernism but that it has been postmodern since the founding fathers.

The state of economics is this: there is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing).

To speak of economics without qualification is misleading. 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.

So, there are the hard rocks of true and false and the bottomless swamp between them where “nothing is clear and everything is possible” (Keynes). The swamp is the natural habitat of blathering economists, of which there are four main schools: Walrasianism, Keynesianism, Marxianism, Austrianism. None of these has achieved anything of scientific value, all four approaches are axiomatically false.

To proceed from failed political economics to a scientifically valid economics requires a paradigm shift from Walrasian microfoundations and Keynes’s flawed macrofoundations to entirely new macrofoundations.

This is achieved with the following set of objective-systemic foundational propositions: (A0) 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. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.#3

These premises are certain, true, primary, entirely free of green cheese behavioral assumptions, and therefore perfectly suited as the foundations of an “edifice that one wishes to expand and to build higher while preserving its stability.” (Hilbert)

To do the paradigm shift, to replace the obsolete Orthodoxy, is normally the mission of Heterodoxy. In economics, traditional Heterodoxy has failed because it sits in the proto-scientific swamp of political economics just like Orthodoxy but only in another corner.#4

Political economics, postmodern philosophy, and Trump have, indeed, one thing in common: all lack the concept of truth.

Egmont Kakarot-Handtke

#1 See also ‘The economist as standup comedian’ and ‘How to get rid of the silly Queen
#2 Peter Pomerantsev
#3 For details see ‘Objective Principles of Economics
#4 See cross-references Heterodoxy

Related 'Economists: the Trumps of science' and 'Orthodoxy vs. Heterodoxy: the squabbling of quacks' and 'When proto-scientific Heterodoxy calls Orthodoxy pseudo-scientific' and 'Heterodoxy’s scientific self-deception' and 'Economics: a science without scientists'

November 21, 2016

Keynes’s message for contemporaries

Comment on Asad Zaman on ‘Reading Keynes’

Blog-Reference

You say: “I am planning a sequence of posts on re-reading Keynes, where I will try to go through the General Theory. ... Secondarily, i hope to be able to summarize Keynes’ insights to make them relevant and useful to a contemporary audience. Thirdly, there are many experts, especially Paul Davidson, on this blog, who will be able to prevent me from making serious mistakes in interpretation.”

Interpretation of Keynes cannot be the goal because we had already a grand debate about ‘what Keynes really meant’ some time ago. The result was inconclusive to say the least. There are two reasons for this:
(i) “But Keynes, too, sometimes gave the impression of not having fully grasped the logic of his own system.” (Laidler, 1999, p. 281)
(ii) “For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’” (Davidson, 1984, p. 574)

Because roughly right is equivalent to roughly wrong, everybody can interpret into Keynes what he likes. And this is what actually happened. The simple fact of the matter is that Keynes and the Post Keynesians got macro wrong.#1 Keynesianism is a halfway house. And from this follows that the only worthwhile goal is to finalize the Keynesian Revolution.#2

The one message of Keynes that is still valid is this: “The [neo-]classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (1973, p. 16)

Keynes pointed the way but did not follow it himself. No re-interpretation can alter the fact that Keynes's macrofoundations are provable false.#3

Egmont Kakarot-Handtke


References
Davidson, P. (1984). Reviving Keynes’s Revolution. Journal of Post Keynesian Economics, 6(4): 561–575. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Laidler, D. (1999). Fabricating the Keynesian Revolution. Cambridge: Cambridge University Press.

#1 See ‘How Keynes got macro wrong and Allais got it right’ and ‘Post Keynesianism, science, and universal idiocy’ and ‘Why Post Keynesianism Is Not Yet a Science
#2 See ‘Finalizing the Keynesian Revolution
#3 See ‘From false micro to true macro: the new economic paradigm

November 20, 2016

Wikipedia and the promotion of economists’ idiotism

Comment on Wikipedia on ‘Sectoral balances’#1

The sectoral balances description is given with two equations:
(1) Y = C + I + G + (X – M)
(2) Y = C + S + T
Legend: Y is GDP (expenditure), C is consumption spending, I is private investment spending, G is government spending, X is exports, M is imports, S is total saving and T is total taxation.

This gives the interrelation of balances:
(3) (S – I) = (G – T) + (X – M)

When foreign trade is taken out of the picture, i.e. X=0, M=0, then (3) reduces to:
(4) (S – I) = (G – T)

Conclusion: “As a matter of accounting between the government and non-government sectors, a government budget deficit adds net financial assets ... available to the private sector and a budget surplus has the opposite effect.” and “While typically obfuscated in standard textbook treatments, at the heart of national income accounting is an identity — the government deficit (surplus) equals the non-government surplus (deficit).”#2

The error/mistake/blunder of this approach is in the definition of the non-governmental sector and in the definition of total saving and in the absence of total profit and distributed profit.#3

The accounting error/mistake/blunder is obfuscated by the fact that government and non-government are juxtaposed. Thus, the crucial differentiation between business sector and household sector gets lost. This in turn has the effect that the most important magnitude of economics — profit — gets also lost. In order to see this one has to go back to the MOST ELEMENTARY configuration, that is, the pure consumption economy which consists only of the household and the business sector.#4, #5

In this elementary economy three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.

In case (i) the monetary saving of the household sector SmYw-C is zero and the monetary profit of the business sector QmC-Yw, too, is zero.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds (a) Qm+Sm=0 or Qm=-Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. It follows directly from the profit definition QmC-Yw and the definition of household sector saving SmYw-C.

When government is added then it holds under the condition of zero investment of the business sector and zero saving of the household sector Qm=G-T, that is, the overall monetary profit of the business sector is positive if the government sector runs a deficit and negative if the government sector runs a surplus.

The balances of the business sector, the household sector and the government sector add up to zero, i.e. (b) Qm+Sm+(T-G)=0 (if I=0), and THIS is the correct accounting identity. It says that budget deficits (G greater T) and household sector dissaving (-Sm) are the two sources of overall monetary profit in a closed economy without business sector investment.

In other words: deficit spending of the government and household sector is the source of total profit in the market economy (with zero distributed profit). Total profit has NOTHING to do with efficiency or exploitation or monopoly or the smartness of CEOs. These factors only influence the DISTRIBUTION of total profit, which is given by Qm=G-T-Sm, BETWEEN the firms that constitute the business sector.

The entry Sectoral balances is the proof that economists — after more than 200 years — still do not understand profit which is the pivotal magnitude of their subject matter. From this follows that ALL OTHER Wikipedia entries about economics are false or incomplete.#6

Egmont Kakarot-Handtke

#1 Wikipedia
#2 See the MMM post ‘Budget surpluses are not national saving
#3 For details see ‘Keynes’s Missing Axioms’ Sec. 14-18 and ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#4 See ‘The tiny little problem with economics
#5 The elementary consumption economy is given by three systemic axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
#6 See for example ‘The final implosion of MMT

November 19, 2016

Economists: The Trumps of science

Comment on David Glasner on ‘OMG! The Age of Trump Is upon Us’

Blog-Reference

You say “The American voters, in their wisdom, have elected a mountebank (OED: “A false pretender to skill or knowledge, a charlatan: a person incurring contempt or ridicule through efforts to acquire something, esp. social distinction or glamour.”), a narcissistic sociopath, as their chief executive and head of state.“

This happened recently in the political realm. In the scientific realm something similar happened 140+ year ago when Jevons/Walras/Menger took over economics. They made a banana science out of it but people are enthusiastic about it until this very day.#1

David Glasner had his epiphany 50 years ago: “When I took my first economics course almost a half century ago and read the greatest economics textbook ever written, University Economics by Armen Alchian and William Allen, I was blown away by their ability to show how much sloppy and muddled thinking there was about how markets work .... I have been a fan of free markets ever since.” (See intro)

The trouble with the Alchian/Allen textbook is the same as with all other economics textbooks, that is, it is utter scientific rubbish.#2

The standard definition of the subject matter is given with the following hard core propositions, a.k.a. axioms: “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.” (Weintraub)

From these premises follows what Leijonhufvud famously called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium. This construct is the one-size-fits-all analytical workhorse of economics.

For every person with some scientific instincts this construct is immediately and forever unacceptable. Economists, to their disgrace, have no scientific instincts at all. They simply swallow every junk hook, line and sinker. Obviously, the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. By consequence, economics from Jevons/Walras/Menger to DSGE/RBC/New Keynesianism is false.

Economists do not know how the actual economy works. They lack the true theory. Instead, they senselessly speculate about nonentities and hallucinate about the marvelous feats of the Invisible Hand.

The worst thing, though, is that economists in their loose talk about markets have not realized until this day that an elementary market system that consists of a consolidated product market and a consolidated labor market is UNSTABLE. This means that, as a matter of principle, there is NO such thing as an overall equilibrium in the market system. The system is NOT self-regulating and self-optimizing, there is NO such thing as an Invisible Hand and this has NOTHING to do with market imperfections or rigidities or information asymmetry. This is a STRUCTURAL feature that is built right into the core of the market system.

It is important to realize that economic policy guidance NEVER had sound scientific foundations. Because economists never captured the essence of the market economy, whatever they have said for or against capitalism, communism or socialism has been based upon provable false theories about how the monetary economy works.#4

Since 140+ years economists are the Trumps of science, that is, "false pretenders to skill or knowledge".

Egmont Kakarot-Handtke

#1 See also ‘Turning the bananatization of economics around
#2 See ‘The father of modern economics and his imbecile kids
#3 See ‘There is no such thing as THE market
#4 See ‘Secular intellectual stagnation


Related 'A new curriculum for swampies?' and 'Could we, please, all focus on the key question of economics? and 'The economist as standup comedian' and 'Wikipedia and the promotion of economists’ idiotism' and 'Economists’s real job problem' and 'Economists: scientists or political clowns?'

How to get out of the deflation trap

Comment on Andrew Gamble on ‘Deflation trap’

Blog-Reference

The usual policy proposals are at best commonsensically true because economics is a failed science, that is, the four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism are axiomatically false and have to be fully replaced. The replacement is called paradigm shift and it is accomplished by moving from false Walrasian microfoundations and false Keynesian macrofoundations to the correct macrofoundations.#1

The elementary macroeconomic Law of Supply and Demand is shown on Wikimedia.#2 This price formula gets, of course, longer with the increasing complexity of the economy.#3 All these details are not needed at the moment.

The elementary Law of Supply and Demand says:
(i) An increase of the expenditure ratio rhoE=C/Y leads to a higher market clearing price (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction. Credit expansion/ contraction in turn affects the quantity of money.
(ii) An increase of the ratio of wage rate to productivity W/R leads to a higher market clearing price.

If the goal is to get a continuous rate of price increase of say 2 percent then there must be either (i) deficit spending of the household or the government sector, i.e. rhoE must be greater than 1, or (ii), the wage rate W must increase faster than the productivity R.

Alternative (i) has two drawbacks: (1) a continuous increase of private/public debt, (2) a direct increase of overall monetary profit because the Profit Law is coupled with the Law of Supply and Demand via the ratio rhoE.#4 So alternative (i) causes heavy distributional collateral damage.#5

From the correct economic theory follows that alternative (ii), i.e. the worldwide increase of wage rate relative to productivity, is the correct policy measure.

Egmont Kakarot-Handtke

#1 For details see cross-references Paradigm shift
#2 Law of Supply and Demand: Pure consumption economy and
#3 Investment economy
#4 The Profit Law
#5 See ‘Keynesianism as ultimate profit machine

November 17, 2016

The economist as standup comedian

Comment on David Ruccio on ‘Blame globalization?’

Blog-Reference and Blog-Reference on Nov 18

There is the political realm where, in principle, everybody is admitted. The currency in the political realm is opinion. Opinion is different from knowledge and the fact of the matter is that it is most of the time false or merely commonsensically true.

“There are always many different opinions and conventions concerning any one problem or subject-matter .... This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion (hearsay, plausible myth) on the other ...” (Popper)

The discourse in the political realm has not much to do with truth or reality but with myth, storytelling, gossip, second-guessing, propaganda, belief, paranoia, and entertainment. From this discourse, though, follow decisions that affect reality either in the intended or an unintended way.

Not all participants in the political discourse are equal with regard to opinion/knowledge about the issue under discussion. Some consider themselves or/and are considered by others as experts. There are two types of experts: practical and scientific. Scientists are supposed to have the most profound general knowledge which comes in the form of a materially and formally consistent theory. Theory is the best humanly possible mental representation of reality. Practical knowledge, on the other hand, is partial and limited.

So it may happen that knowledge is injected into the discourse and that it crowds out opinion to a greater or lesser degree. The underlying idea is that more knowledge improves the final decision and thereby the chance of success, i.e. the realization of the intended outcome.

The very characteristic of economics is that there is no clear-cut separation between politics and science. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became a failed science.

The current state is this: economics is NOT a science and the representative economist is NOT a scientist. The claim as expressed in this title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is false.

What the general public cannot see is that economists do not have the true theory. That is rather bad because: “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)

An economist who rises to speak in the political arena does not add objective scientific knowledge ― he has none ― but merely his opinion, educated common sense and some specific institutional/practical knowledge. Specific knowledge is helpful for small scale issues (e.g. employment in a firm) but of little use for large scale issues (e.g. full employment in the world economy). Small scale knowledge is always subject to the fallacy of composition, that is, it is true for a tiny part of the whole but false for the whole.

Economics in the proper sense is the science that figures out how the monetary economy works. The representative economist does not know how the economy works. There are four approaches: Walrasianism, Keynesianism, Marxianism, Austrianism and all are axiomatically false. Economics has not lived up to well-defined scientific standards in the last 200+ years. Whatever an economist argues for or against has NO sound scientific foundation.

What the general public cannot see is that ALL economists who rise to speak in the political realm are incompetent scientists. What economists communicate is NOT scientific knowledge but opinion. It does not matter whether the opinion is more rightist or more leftist, the loudspeaker of the economics profession from Krugman to Keen are stand up comedians in the Circus Maximus, not scientists. Neither orthodox nor heterodox economists can rightfully claim to speak in the name of science. What they actually do is to abuse the aura of science to push an agenda. Therefore, all have to be expelled from the scientific community.

The general public judges political economists by their expressed opinion. Opinion, though, is worthless, we have more than enough of it. The general public cannot and does not judge economists by their scientific competence but assumes that it is guaranteed somehow. But this is not the case.

What the general public cannot see is that economics is still at the proto-scientific level. Until this day, the representative economist cannot tell the difference between profit and income, which are indisputably the most important concepts of his subject matter.* Because economists never captured the essence of the market economy, they can neither diagnose systemic crises correctly nor solve them. Because there is no true economic theory ALL economic policy guidance is scientifically unfounded since Adam Smith. Whatever economists have said for or against capitalism, communism or socialism has been based upon provable false theories about how the monetary economy works.

Egmont Kakarot-Handtke

* For details see cross-references Profit


Related 'There is NO such thing as an economic expert' and 'Political economics: a deadhead sitcom' and 'Economists: Jacks of all trades ― except economics' and 'Scientific suicide in the revolving door' and 'Economists ― medics or barber surgeons?'

***
REPLY to Sandwichman on Nov 21

You say: “... have I ever mentioned to you that I am NOT an economist? As a self-proclaimed ‘scientist’ have you never heard of the concept of category error?”

I would like to come to a common understanding of what we are trying to achieve here on the EconoSpeak blog.

First of all, the only interesting thing is the economic content of a post. The author’s person or CV is of NO interest at all. Obviously, one cannot and does not make an identity check before one comments on a post.

This is a GOOD thing because the author’s personality and motives are only of interest in the realm of politics/entertainment but not in science. As Schumpeter put it: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

The only question in a scientific discourse is whether a statement is true or false. As Popper put it: “And a critical discussion is well-conducted if it is entirely devoted to one aim: to find a flaw in the claim that a certain theory presents a solution to a certain problem.”

The moment a second criterion is introduced all is lost. More specifically, the moment economics is mixed with politics the discourse goes down the drain. The reason is simple, a scientific discourse has a solution: true or false. A political discourse has no solution but is decided by majority vote or authority or throwing a coin.

It is well known from history that politics habitually tries to overrule science: “As some one has said, it would seem that even the theorems of Euclid would be challenged and doubted if they should be appealed to by one political party as against another.” (Fisher)

It is also well known that this happened in economics with the result that political economics has produced nothing of scientific value in the last 200+ years.

What economics needs first of all is the strict separation of science and politics because politics de-focuses research: “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)

At the moment we have no true economic theory, i.e. a theory of how the monetary economy works that satisfies the well-defined scientific criteria of formal and material consistency. Economists are well advised to bring their own house in order before they dabble in other disciplines like sociology, history, philosophy or political sciences.*

Whether you are an economist or not does not matter. Only the economic content of your post matters. If you contribute to the necessary paradigm shift you are welcome to the economics discourse, if you try to push a political agenda you are not. To flip between economics and politics is the worst category error/mistake/blunder ever.

* See also:
Economists: the Trumps of science
Economists are a menace to their fellow citizens
Politics or Science? Decide and act accordingly

***
REPLY to Sandwichman

It seems that you pick quotes out of your nose: “Egmont: But the Bible is NOT SCIENCE!”

Egmont never mentioned the Bible. What I said was “Economics is NOT a science and the representative economist is NOT a scientist.”

Bloomberg writes today: “Paul Romer says he really hadn’t planned to trash macroeconomics as a math-obsessed pseudoscience. ... It just sort of happened.”

Bloomberg hails Romer as “The rebel who blew up macroeconomics” and tells the soap story of how the naive hero Romer almost unintentionally slaughtered the three-headed dragon of Orthodoxy. Bloomberg knows that economists swallow every junk. After all, they swallow supply-demand-equilibrium since 140+ years.

Where Romer is right is that economics is a pseudoscience. What is curious, though, is this: “His name is often raised during Nobel season ― this year, much to his chagrin, by his last academic home. In early October, New York University announced a press conference to congratulate Romer for winning the prize, then apologized for mistakenly posting a document it had prepared just in case he won. Which he didn’t.”

Of course not! Don’t they know in New York University the full title of the Prize? It is: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel.” Sciences (plural) and NOT pseudoscience.

There seems to be widespread confusion about the scientific status of economics nowadays.#2 One thing, though, is certain, Romer is NOT a scientist but just another standup comedian in the Circus Maximus.

By the way, I really hadn’t planned to trash Sandwichman. . . . It just sort of happened.

#1 Source
#2 For details of the big picture see cross-references Scientific Incompetence

November 15, 2016

Economists: Jacks of all trades ― except economics

Comment on merijntknibbe on ‘Global warming: bet on it’

Blog-Reference

The state of economics is this: there is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became a failed science.

What is entirely missing among economists is an understanding of what science is all about. More specifically, economists miss their very subject matter.* It is NOT the task of the economist to dabble in psychology, sociology, political sciences, geopolitics, law, history, anthropology, social philosophy, biology/Darwinism, etcetera. And it is NOT their task to dabble in climatology. Whether there is global warming in the short/long run and whether it is anthropogenic or not is a question which falls outside the scientific competence of economists. The main reason is that economists have NO scientific competence at all.

The proof is in the current state of economics. Economics is a failed science. More specifically, political economists have produced not much, if anything, of scientific value in the last 200+ years.

“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)

There is no such thing as a true economic theory. The four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory and axiomatically false, that is, beyond repair. These failed approaches are in a zombie state ― dead but not buried ― waiting to be replaced by a superior paradigm.

What economists have produced so far is scientific rubbish: much political opinion but no scientific knowledge, which comes in the form of a materially and formally consistent theory about how the actual economy works.

Both, Orthodoxy and traditional Heterodoxy is lost for science. Economists cannot be taken seriously ― not when they speak about the economy and still less when they talk about global warming.

Egmont Kakarot-Handtke

* See ‘Economists’ three-layered scientific incompetence’ and ‘Mental messies and loose losers

Related 'There is NO such thing as an economic expert' and 'Economists cannot do the simple math of profit — better keep them out of politics' and for more details of the big picture see cross-references Incompetence

November 14, 2016

Heterodoxy’s popular but silly math denial

Comment on Lars Syll on ‘Formalized economics bordering on the insane’

Blog-Reference

It is well known that orthodox economics is misapplied math (Mirowski). The abuse has been criticized under the label mathiness but in fact has a wider methodological dimension. The problem with economists is that they are cargo cult scientists: “... they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.” (Feynman) What is missing is a deeper understanding of science and mathematics and the relation between the two.

Metaphorically speaking, scientists put first their trousers on and then their boots, economists do it the other way round: “The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein)

In the same vein: “Surely it would be considered absurd, bordering on the insane, if a surgical procedure was implemented because a tool for its implementation was devised by a medical doctor who knew and believed in topological fixed-point theorems?” (Velupillai, see intro)

The absurdity began with economists borrowing the tool ― calculus ― from physics and making a behavioral axiom out of it: “HC2 agents individually optimize subject to constraints.” (Weintraub) This has been the fundamental methodological mistake: the tool came first and the pivotal behavioral assumption was tailored to the tool.

Walras’s determination of general equilibrium was found wanting by mathematicians: “You know, Oskar, if those books are unearthed sometime a few hundred years hence, people will not believe they were written in our time. Rather, they will think that they are about contemporary with Newton, so primitive is their mathematics. Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (von Neumann) And this critique led eventually to the fixpoint theorem.

However, the formal rectification left Walras’s conceptual root structure unchanged: “It seems clear that Debreu intended his Theory of Value to serve as the direct analogue of Bourbaki's Theory of Sets, right down to the title. ... But this required one very crucial maneuver that was nowhere stated explicitly: namely, that the model of Walrasian general equilibrium was the root structure from which all further scientific work in economics would eventuate.” (Weintraub)

Walras’s root structure is defined with this axiom set: “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.” (Weintraub)

Two things should be obvious: (i) the axiom set contains three nonentities (HC2, 4, 5) and is therefore forever unacceptable, and (ii), when the conceptual root structure is false then it does not help much to express it in set theoretical terms. Formalization does not make a false behavioral assumption like utility maximization true.

When the elementary framework of concepts consists of economic nonentities then no amount of formalization helps and math cannot unfold its specific strength. Physics took off not until the foundational concepts energy, mass, force, velocity, acceleration, etcetera were clearly defined and properly understood.

Economics is still at the proto-scientific level and the representative economist cannot even tell the difference between profit and income.#1 In order to get out of utter confusion and to put economics on firm ground formalization is indispensable: “I mean by this that formalization eliminates provincial and inessential features of the way in which a scientific theory has been thought about. ... Formalization is a way of setting off from the forest of implicit assumptions and the surrounding thickness of confusion, the ground that is required for the theory being considered. ... In areas of science where great controversy exists about even the most elementary concepts, the value of such formalization can be substantial.” (Suppes)

Orthodoxy has misapplied formalization and traditional Heterodoxy has never been able to put it to good use. With incompetent scientists it is no wonder that economics is a failed science. As long as Heterodoxy insists on storytelling and is unable to apply the enormous leverage of mathematics it will not get out of its proto-scientific burrow.

With regard to mathiness holds: from the misapplication of Orthodoxy does not follow the non-application of traditional Heterodoxy but the proper application of constructive Heterodoxy.#2

Egmont Kakarot-Handtke

#1 See ‘Profit and the collective failure of economists
#2 For the complete and consistent set of foundational equations see cross-references ‘Paradigm shift

For more details of the big picture see cross-references Heterodoxy and cross-references Mathiness

November 13, 2016

A new curriculum for swampies?

Comment on Lars Syll on ‘The need for a new economics curriculum without the present suicidal formalism’

Blog-References and Blog-Reference and Blog-Reference on Nov 18 and Blog-Reference on Apr 25, 2017, adapted to context

A new economics curriculum is needed, no doubt about this. But why exactly? Some say because there is too much mathematics. Other say, there is not enough history/ psychology/ sociology/ philosophy. Still, others demand that heterodox economists like Schumpeter or Marx should be given more weight.

There is some superficial plausibility in all of this, but these popular arguments miss the crucial point. The fact of the matter is that there are four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― and ALL FOUR are provably false. What economics needs is a scientifically valid curriculum, but there is none because there is no scientifically valid economic theory. After 200+ years economics is still at the level of a proto-science or what Feynman called a cargo cult science.

So, when Keynesian and Marxian economists argue that the Walrasian curriculum is false, or unrealistic, or biased then one can readily agree. The problem is that Keynesian or Marxian economics is not one iota better, it is only false in a different way. Actually, both Keynesian and Marxian profit theory is provable false (2013; 2014), just like Walrasian profit theory.

To mix a new curriculum of Walrasian, Keynesian, Marxian, Austrian contents is an idea of unsurpassable idiocy. The true theory does not emerge from a mixture of provably false theories.

The state of economics is this: there is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became a failed science.

What is entirely missing among economists is an understanding of what science is all about. Science is digital = binary = true/false and NOTHING in between. There is NO such thing in science as roughly right or roughly wrong, there is only materially/formally true/false. All the rest of human communication is storytelling, gossip, sitcom, rhetoric, opinion. Vague blather, untestable wish-wash, inconclusive either-or and preaching has always been the hallmark of political economists.

So, there are the hard rocks of true and false and the swamp between them where “nothing is clear and everything is possible” (Keynes). The swamp is the natural habitat of morons, agenda pushers, confused confusers, trolls, and incompetent scientists.

Economists are natural born swampies. In marked contrast, scientists drive the question under discussion to the point of a clear-cut decision between true and false. And they do not touch questions that cannot be decided by the accepted means, that is, by logic and testing.

The Brotherhood of Orthodox and Heterodox Swampies has no genuine interest in a definite true/false outcome but seeks to stay in the swamp. Their common enemy is science. Swampies have produced the gigantic heap of toxic scientific waste that is called economics.

Have swampies learned anything from their abysmal failure? Only that they want more than ever to stay in the swamp: “Economics should not be taught as if it were about the discovery of timeless laws. Those who champion the discipline must remember that, at its core, it is about human behaviour, with all the messiness and disorder that this implies.” (Financial Times)

Economists never understood what their subject matter is. Economics is NOT a social science that deals with the behavior of people, but a system science that deals with the behavior of the economic system.#1 Human behavior does not follow timeless laws but the economic system does. The fact of the matter is that neither orthodox nor heterodox economists have figured out the fundamental systemic laws (the Profit Law for example) until this very day.

Two hundred years of failure are enough. Time to expel the swampies from the scientific community. And, of course, high time to install a scientifically valid economics curriculum.#2

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2013). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL or URL
Kakarot-Handtke, E. (2014). Profit for Marxists. SSRN Working Paper Series, 2414301: 1–25. URL

#1 See cross-references ‘Not a science of behavior
#2 See cross-references ‘New curriculum


Related 'There is NO such thing as an economic expert' and 'The father of modern economics and his imbecile kids' and 'The economist as standup comedian'

November 12, 2016

How to end the futile economics zombie ping-pong

Comment on Simon Wren-Lewis on ‘Do New Keynesians assume full employment?’

Blog-Reference

It is impossible for Nick Rowe and Simon Wren-Lewis to get their heads around the fact that Walrasianism, Keynesianism, Marxianism, Austrianism is axiomatically false, that is, beyond repair. So ― not to get them out from behind the curve ― just for the record: it is pointless to pick one aspect, e.g. employment, and to discuss the respective faults or merits of some model variants. The iron methodological rule says: when the axioms are false the whole analytical superstructure is false.

Already Keynes knew this: “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.”

Standard economics is built upon false premises. Therefore, the way forward is to bury all variants for good and to fully replace the false Walrasian micro axioms and the false Keynesian macro axioms by true macro axioms.#1

This is the correct set of premises: (A0) 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. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

(A1) to (A3) defines the pure consumption economy.#2 Note that the set of foundational equations is ENTIRELY FREE of behavioral assumptions like constrained/intertemporal optimization or equilibrium, that is, the axiom set is OBJECTIVE SYSTEMIC. This new analytical workhorse fully replaces Nick Rowe’s hallucinatory behavioral construct.

In the pure consumption economy, this is what happens if, for example, the productivity falls, due to some shock, by 50 percent: the price doubles because the correct Law of Supply and Demand says for the most elementary case that P=W/R, i.e., the market clearing price is equal to unit wage costs or, in other words, the real wage is equal to the productivity at any employment level, i.e. W/P=R. This is the objective-systemic configuration to start with. The usual guessing ping-pong about what agents might maximize or expect or do has always been futile, is futile with Nick and Simon, and will be futile for all eternity.

From the minimalist formal core, (A1) to (A3) follows in consistent logical steps the investment economy with the systemic employment equation, a.k.a. Phillips curve.#3,#4

The systemic employment equation says that employment increases if productivity falls and all other variables are held constant. Secular stagnation results from productivity and price rising faster than the wage rate, with all other variables held constant.

To paraphrase a summary of Blaug: ‘At long last, it can be said that the history of general theory from Walras to Arrow-Debreu and on to DSGE and New Keynesianism has been a journey down a blind alley, and it is the set A1/A3 to have finally hammered down the nails in the coffin.’

Egmont Kakarot-Handtke

#1 See ‘How to restart economics’ and ‘From microfoundations to macrofoundations
#2 For a detailed description see ‘The future of economics: why you will probably not be admitted to it, and why this is a good thing
#3 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#4 Equation on Wikimedia

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REPLY to Anonymous on Nov 18

You say: “in keynes y=I+C consumption is spending from current income only like, you know, the marginal propensity to consume, consume out of what?”

Yes, I know what Keynes said. And I know also (i) what Keynes said is false, (ii) After-Keynesians have not realized it until this day.

This is what Keynes said in the General Theory “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes 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.)

Because profit ― the pivotal magnitude of economics ― is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S and IS-LM models.#1

Neither pro-Keynesians nor anti-Keynesians detected Keynes's foundational error/mistake in the last 80 years. It was Allais who got the elementary mathematics of national accounting right.#2

Keynes was not a great thinker but what came after him is abysmal. Anonymous is a case in point.

#1 For the formal proof see ‘Why Post Keynesianism Is Not Yet a Science
#2 See ‘How Keynes got macro wrong and Allais got it right

November 11, 2016

Political economics: a deadhead sitcom

Comment on Lars Syll on ‘Why Trump won the election’

Blog-Reference

There is political economics and theoretical economics. The founding fathers called themselves political economists, that is, they left no doubt that their main business was agenda pushing. Economists never got out of political economics. In other words, theoretical economics (= science) ultimately could not emancipate itself from political economics (= agenda pushing). And this is how economics became one of the most embarrassing scientific failures of all times.

The fact of the matter is that economists do not know how the actual economy works.#1 They do not even understand the foundational concepts of their subject matter, that is, profit and income. This is comparable to medieval physics when physicists did not properly understand the foundational concepts of their subject matter, that is, energy, mass, force, velocity, acceleration etcetera.

The actual state of economics is this: the four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism are provable false. In methodological terms: all four approaches are axiomatically false, that is, beyond repair. There is no use at all to discuss their respective faults or merits, the way forward is to fully replace them. At the moment, about 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks is scientific rubbish.#2

The double insanity of economists consists in (i) not realizing that they are failed scientists, (ii) in stepping forward as experts and issuing economic policy guidance. The election campaign has delivered as much proof as anybody ever wanted to see.#3

Economists do not understand what their subject matter is. They do not even realize that the question ‘Why Trump won the election’ is a question for psychology, sociology, political science etcetera and NOT AT ALL for economics. Economics is NOT a social science that deals with the behavior of people, but a system science that deals with the behavior of the economic system, or more specifically, with the interrelation of measurable economic variables like wage income, profit, productivity, employment, money, etcetera.

Political economists do not know how the actual economy works. They lack the true theory. Instead, they senselessly speculate about NONENTITIES like utility maximization, rational expectations, equilibrium and hallucinate about the marvelous feats of the Invisible Hand. The whole stuff is exactly at the same level as ‘Had Adam a navel?’ or ‘How many angels can dance on a pinpoint?’.

It is important to first of all realize that economic policy guidance NEVER had sound scientific foundations. And it does not matter at all whether this guidance has been more rightist or more leftist. ALL political economists are scientific failures.

Political economists have captured economics 200 years ago and steered it into the wrong direction “... but when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.” (Hume)

To be sure, it has been political agenda pushing that led economists astray.

The general public’s idea that economists can solve economic problems has always been a bad joke because economists are the VERY CAUSE of economic problems.#4 And there is NO difference between team blue and team red.

Egmont Kakarot-Handtke

#1 See also ‘There is NO such thing as an economic expert
#2 See ‘The father of modern economics and his imbecile kids
#3 See also ‘Krugman and the scientific implosion of economics
#4 See ‘How economists murdered the economy and got away with it

For more details of the big picture see cross-references Political Economics