August 21, 2017

Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother

Comment on Bill Mitchell on ‘When neo-liberal masquerades as anti-establishment’

Blog-Reference and Blog-Reference

There is the political sphere and there is the scientific sphere. It is quite obvious that both are fundamentally different and because of this, it is of utmost importance to radically separate the two. The mixing of the two is the hereditary mental disease of economics.

Politics is about the realization of the good society. This presupposes an idea what the good society is and the practical capacity to make things happen. In very general terms, the political sphere is about values and action, and the crucial distinction is between good/bad or better/worse. Science is about knowledge and the crucial distinction is between true/false with truth unequivocally defined by material and formal consistency.

That much is clear after more than 200 years: economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and ALL got the foundational concept of the subject matter ― profit ― wrong.

So, this is the situation: economists dabble in politics where they have, to begin with, NO legitimate business. Worse, economists’ policy guidance has NO sound scientific foundations at all. This starts with Adam Smith/Karl Marx and ends with current orthodox and heterodox economics. MMT is NO exception.

Political economics is not only cargo cult science but ― intentionally or unintentionally does not matter ― political fraud: “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 are supposed to deliver knowledge (= episteme) but produce since 200+ years scientifically worthless political opinion (= doxa). To sell opinion under the label of science is fraud.

MMT is a case in point. Bill Mitchell criticizes mainstream economics in its incarnation of New Zealand’s TOP party. All his arguments are accurate, except when it comes to the theoretical underpinning of MMT policy proposals.

Bill Mitchell claims: “… MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system. It helps us better understand the choices available to a currency-issuing government. It is not a regime but a perspective on reality. … In that sense, MMT is neither right-wing nor left-wing.”

MMT claims to be objective scientific truth. Fact is that it is proto-scientific rubbish, qualitatively not at all different from orthodox economics. MMT’s profit/employment/ money theory is provably false. In methodological terms, MMT is NOT a valid new paradigm because its axiomatic foundations are false just like Walrasian microfoundations and Keynesian macrofoundations are materially/formally inconsistent.

One example. Bill Mitchell claims: “Third, it is 100% correct to say that if the government runs a fiscal surplus then it condemns the non-government sector to run a deficit (spending more than its income) as a matter of accounting, dollar for dollar.”

No, this is NOT 100% correct. This is misleading, to say the least. The correct accounting truth is this. There is no such thing as a non-government sector, to begin with, only a business sector and a household sector. So, if the household sector chooses its saving/dissaving in a given period then a government deficit/surplus “condemns” the business sector to profit/loss.

These are the correct accounting identities:
Qm≡C+G-Yw     profit/loss Qm, business sector,
Sm≡Yw-T-C       saving/dissaving Sm, household sector,
Bm≡T-G            budget surplus/deficit Bm, government sector,
Qm+Sm+Bm=0.

For THREE sectors, proper accounting yields THREE sectoral balances which add up to zero. The question is, why makes MMT profit disappear by creating an artificial sector called non-government sector? In other words, why is MMT cooking the books? There is NO scientific justification, so it must be some political reason.*

MMT is NOT a new scientific paradigm but the old political crap in a new scientific bluff package. This holds for ALL of economics: when profit is false the whole theoretical superstructure is false and economic policy guidance has NO sound scientific foundation.

Egmont Kakarot-Handtke

* For more details see ‘MMT and the magical profit disappearance’ and cross-references MMT


Related 'MMT is NOT an alternative to neoliberalism'

August 20, 2017

Economics, free speech, and censorship

Comment on Sandwichman on ‘Slavery, “Heritage” and Southern Fried “Free Speech”’

Blog-Reference

Sandwichman on free speech/censorship in the South:

This should also put to rest any notion that “defenders of Southern heritage” are champions of “free speech.” The are liars, cry-babies, hypocrites and TOTALITARIANS bent on imposing their self-serving distortions of history on everyone else.

Sandwichman on free speech/censorship on EconoSpeak:

I deleted an Egmont Kakaroach-Handjob “comment” as spam. To explain why, here is one example of his argument: according to Egmont my statement that experts didn’t know what they were talking about “presupposes that there exist experts who know how the market economy works.” Of course it presupposes no such thing.

To say that Egmont is a fucking idiot does not presuppose that there is an Egmont who is NOT a fucking idiot. Deleting Egmont’s comment as spam does not presuppose that there is an Egmont comment that is not spam.

All future comments from Egmont will be deleted as spam.

November 9, 2016 at 9:33 AM

“Barkley Rosser and Sandwichman as ‘The Worst Human Beings Ever Corrupting Economic Blogs’ because they will suppress this post as they have many times suppressed posts which expose their abject incompetence and stupidity”

KakaRoach Handjob’s future contributions will also be deleted as are (following inspection) advertising spam with links to porn sites.

January 26, 2017 at 11:31 PM*

Egmont Kakarot-Handtke

* See also ‘Needed: The Worst of the Worst of economics blogs

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Screenshot Aug 20, 10:43
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Screenshot Aug 20, 19:01

August 17, 2017

MMT is NOT an alternative to neoliberalism

Comment on Patricia Pino/THE PILEUS on ‘Labour’s economic alternative to neoliberalism’

Blog-Reference

MMT is right in pointing out that orthodox economics is false. This, though, is only part of the story. Fact is that the WHOLE of economics is false, i.e. the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and ALL got the pivotal economic concept profit wrong. MMT as a Keynesian offshoot is NO exception.

Economics does not satisfy the criteria of science ― material and formal consistency ― and because of this NONE of the economic platforms from the outer left wing to the outer right wing has sound scientific foundations. All of economics is storytelling and a scientific fraud. MMT is NO exception.

Let us have a look at the main arguments.#1

• “All government spending is our income, a government surplus is our deficit (debt) and a government deficit is our surplus (savings). Government spending isn’t just necessary to run our public services it also helps us to increase our wealth.”

This is false. The counterpart of a government deficit is the profit of the business sector or the saving of the household sector or a combination of the two. In the main, it is profit, therefore it is misleading to say that a government deficit ‘helps us to increase our wealth’. “Our wealth” is NOT the wealth of the 99-percenters but of the 1-percenters.

What has been called an absurdly unequal distribution of income and wealth is the DIRECT result of public AND private deficit spending and the exponential increase of public AND private debt.

• “What neoliberals call government debt is in fact savings to the private sector. This is composed of bonds and guilts which are purchased by the population at large…. The reason they are so popular is because they are seen as the safest form of investment.”

This, of course, is true, except for the fact that government securities are not bought and held by ‘the population at large’ but by the 1-percenters. With the promotion of deficit spending, MMT sees to it that the business sector not only enjoys profit but also a risk-free asset and a long term flow of interest. This flow comes in subsequent periods from the taxation of the household sector and is secured by the taxing power of government.

Patricia Pino sums up: “Macroeconomics is a complex subject.” This is true and what the general public needs to know is that economists do not understand it.#2 Economists do not even understand profit which is the pivotal concept of their subject matter. Economics is a failed science and MMT is part of it.

Egmont Kakarot-Handtke

#1 For the comprehensive overview and the point-by-point refutation of MMT see cross-references
#2 First Lecture in New Economic Thinking


Related 'Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother'

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REPLY to Calgacus on Aug 18

You say: “…, of course MMTers & functional financiers understand you points, and treat them at length, and explain how the alternative you may be proposing ― no deficit spending? ― is worse. Sorry to put words in your mouth, but that seems to be your position.”

Time to get above the usual kindergarten blah-blah. My argument is NOT about a specific economic policy but that economic policy has NO sound scientific foundations. In other words, economic theory is scientific rubbish ― including MMT. The result is that economists in their bottomless stupidity ruin the economy.#1

So, my position is the same as Napoleon’s: “Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

Note that I am not crazed about the deficit or any other MMT policy issue. The point at issue is that MMT policy proposals have NO sound scientific foundations. MMT is materially and formally inconsistent and just as ill-founded as neoliberalism. Therefore, it is NO alternative to neoliberalism. Scientifically, it is the same crap in a different political package.

I have refuted the theoretical foundations of MMT point-by-point on this blog.#2 The bottom line is this, MMT lacks the true theory and this is lethal: “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)

So, whatever MMTers are claiming to do and whatever they think of themselves they are doing does NOT matter. Because the theoretical foundations of MMT are defective and MMTers are in the state of self-delusion, what MMT economic policy OBJECTIVELY amounts to is a wellness program for the 1-percenters.#3

It seems that MMT fell victim to the Law of Unintended Consequences: “The concept of unintended consequences is one of the building blocks of economics. Adam Smith’s ‘invisible hand,’ the most famous metaphor in social science, is an example of a positive unintended consequence. Smith maintained that each individual, seeking only his own gain, ‘is led by an invisible hand to promote an end which was no part of his intention,’ that end being the public interest.”

MMT is the inverse case: it seeks to promote public interest but ends up with promoting private interest.

#1 Mass unemployment: The joint failure of orthodox and heterodox economics
#2 See cross-references MMT
#3 See also ‘Keynesianism as ultimate profit machine
#4 The Concise Encyclopedia of Economics

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REPLY to Ralph Musgrave on Aug 18

Ralph Musgrave cannot resist the temptation to expose himself again as a brainless blatherer. He argues “… I’ll do him a favour and demolish one of his phrases: ‘The counterpart of a government deficit is the profit of the business sector or the saving of the household sector or a combination of the two.’ The mistake there is the popular assumption that a business’s profit (or the profit of the entire business sector) is equal to the increase in it’s stock of cash. That’s nonsense. A business or the business sector can increase its stock of cash during the year, but still make a loss (e.g. because its stock of assets lose a lot of value because of depreciation or obsolescence, or because lots of its debtors turn out to be no-hopers, which was what happened to banks when they realized the NINJA mortgagors they’d lent to were no hopers.)”

WOW, that is rather big news. If Ralph Musgrave were a little smarter than a fruit fly he would have taken a closer look at the full set of macro axioms.#1 The definition of TOTAL profit says that it is the sum of MONETARY profit/loss Qm and NONMONETARY profit/loss Qn. The latter is not an issue in the present context because MMTers do not even understand the concept of monetary profit.

Nonmonetary profit has been dealt with at length elsewhere.#2

#1 Wikimedia, New axiomatic foundations
#2 See cross-references Profit

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REPLY to Calgacus on Aug 19

(i) You say: “There is a minimal level of understanding of a theory that is necessary refute it. A point-by-point refutation has to be that of the theoretician’s points, not things selected by the ‘refuter’.”

I have NOT selected anything, I have refuted all 16 posts that have been presented by Peter Copper on this blog as the key propositions of MMT.#1

Take notice that MMT is refuted on ALL counts.

(ii) You say: “You seem to be saying that deficits are bad, because the money can wind up in the hands of the rich. This is not news & one does not need anybody’s ‘true theory’ beyond educated common sense. This is not a valid criticism of deficit spending.”

I have NOWHERE said that deficit spending is “bad”. I have PROVED that the Keynesian/Post Keynesian/MMT profit/employment/money theory is false.#2, #3

(iii) Do not argue against what I SEEM to be saying but what I AM saying which is easy to check by everybody thanks to an abundance of smart search tools.#4

(iv) Your reference to the trickle-up meme is misplaced. What I have clearly stated is that public deficit spending is, since Keynes, a veritable profit machine.#5 Public and private deficit spending over the last decades explains the extremely biased income distribution which MMTers certainly do not endorse.#6 That there is a logical contradiction in the MMT argument should be plain.

(v) The policy proposals of MMT are based on a provably false profit/employment/money theory and they are propagated with misleading arguments. Assertions like “Government spending isn’t just necessary to run our public services it also helps us to increase our wealth” are actually false with regard to “us” and “ours”. Same with Lerner’s directly contradicting assertion: “We owe the debt to ourselves”.

(vi) MMTers are incompetent scientists. Their policy proposals have NO sound scientific foundations. MMT is soap box economics just like neoliberalism. BOTH approaches are materially and formally inconsistent and their proper place is the waste basket of proto-scientific rubbish.

#1 See cross-references MMT
#2 Unemployment is high because economics is false: period, full stop, end of story
#3 Putting economic policy on scientific foundations
#4 Just enter ‘employment equation’ or ‘Phillips curve’ in the search field (Ctrl F) of the AXEC blog
#5 Keynesianism as ultimate profit machine
#6 Profit and the decline of labor’s nominal share

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REPLY to MRW on Aug 19

You are asking: “Why do you keep insisting that MMT is supposed to be based on ‘sound scientific foundations.’ What the hell for, Egmont?”

Since Adam Smith/Karl Marx economics is explicitly defined as science. The general public is year after year reminded of this fact with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. And every economist learns in Econ 101: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins)

Clearly, economics is since 200+ years a self-declared science. Now, science is well-defined since 2000+ years by material and formal consistency: “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)

Fact is: economics is a failed science because economists are scientifically incompetent. Fact is that since Adam Smith economic policy guidance never had sound scientific foundations. Both, orthodox and heterodox economists sell proto-scientific rubbish in the bluff package of science.

You argue: “It’s been clear from Day One that it’s based on accounting and accounting rules, and the US congressional reality that our country creates its own currency, which since 1971 (internationally) has been a sovereign non-convertible currency with a floating exchange rate. That’s not a scientific fact, Egmont, that’s an accounting reality.”

Unfortunately, economists did not even get the elementary mathematics of accounting right in the past 200+ years.#1 What you call accounting reality is one of the worst scientific blunders of all times.

Because economists, including MMTers, continually violate scientific standards they have to be expelled from the sciences. Their proper role is that of clowns in the political circus.

# For details see cross-references Accounting

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REPLY to MRW on Aug 20

Thank you for the links.

Of course, I agree with Paul Davidson and you that Samuelson’s ergodic axiom is proto-scientific rubbish like all of Samuelson’s.#1 The point is, though, that Keynes, Davidson, Post Keynesianism, and MMT, too, is proto-scientific rubbish. And this has NOTHING to do with ergodicity/nonergodicity, which, to begin with, does not at all apply to economics, but with profit, which, indeed, is the foundational concept of all of economics. Fact is that Keynes, Samuelson, Davidson, Kelton, Mitchell, Wray, and all the rest of the MMT crowd got profit wrong.

The formal core of the General Theory is given with: “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 is ill-defined the whole theoretical superstructure of Keynesianism is false. Let this sink in: Keynes had NO idea of the fundamental concepts of economics, that is, of profit and income. Neither have After-Keynesians.

Keynes’s lethal blunder is in the premise Income = value of output. The same blunder reappears in the most used economics textbook: “GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP.” (Samuelson and Nordhaus, 1998, p. 392)

Some generations of dull economics students later, the same lethal blunder reappears in MMT: “We have seen that total spending equals total income.”#2

For the rectification of this 200+ years old proto-scientific embarrassment see ‘Macro for dummies’.#3

When Samuelson’s Walrasian microfoundations and Keynes’s false macrofoundations are flushed down the drain and replaced by the correct macrofoundations one gets the Profit Law, the Law of Supply and Demand, and other essential economic relationships.#4 These relationships are SYSTEMIC and because of this Davidson’s ridiculous ergodicity/ nonergodicity pseudo-issue vaporizes with a minuscule puff just like Samuelson’s cargo cultic synthesis previously.

Egmont Kakarot-Handtke

#1 For the detailed arguments just enter ‘Samuelson’ or ‘Davidson’ or ‘ergodicity’ in the search field (Ctrl F) of the AXEC blog.
#2 Peter Cooper ‘Short & Simple 16 – The Expenditure Multiplier and Income Determination
#3 For the full-spectrum refutation of MMT see cross-references
#4 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

No exploitation, no classes

Comment on Michael Hudson/Counterpunch/FAIRCONOMY on ‘Putting an End to the Rent Economy’

Blog-Reference

For most people economics is a story about wealth and riches, the conflicts between capitalists and workers, the fraud and deception of the corrupt one-percenters and the hardships of the honest and exploited/alienated 99-percenters. This is the soap opera view of economics.

The scientific view is not focused on the human drama/farce but on the functioning of the economic system as a whole. Economics leaves all questions about Human Nature/motives/ behavior/action to psychology, sociology, anthropology, history, political science, biology, etcetera.#1, #2

Because NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works all behavioral approaches have failed. The actual state of economics is this: Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. Fact is that the Walrasian approach = microfoundations and the Keynesian approach = macrofoundations have already been dead in the cradle.

Therefore, economics has to undergo a paradigm shift. Economic analysis has to be based on entirely new macrofoundations and the fundamental questions have to be put again at the top of the agenda and answered with the help of better analytical tools. The key concepts of classical economics were profit, capital, exploitation, and classes. So let us, first of all, revisit profit.

The pure consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the 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

Under the conditions of market clearing X=O and budget balancing C=Yw in each period the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the Law of Supply and Demand. It translates into W/P=R (2), i.e. the real wage is equal to the productivity. For the graphical representation see Wikimedia.#4

Monetary profit is defined as Qm≡C-Yw and monetary saving as Sm≡Yw-C. It always holds Qm+Sm=0 or Qm=-Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law.

In the pure consumption economy, labor gets the whole product according to (2), and profit for the business sector as a whole is zero because of C=Yw. All changes in the system are reflected by the market clearing price. As a matter of principle, the pure consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined by the productivity.

Now, the business sector is split into two identical firms and firm 1 is supposed to cut the wage rate W1 by half. From this follows that the market clearing price P declines if all other variables are unchanged. Firm 2 is affected because total income Yw falls and with it consumption expenditures C and the market clearing price P.

The reduction of the wage rate W1 increases the profit of firm 1 and produces a loss in firm 2. When we look alone at firm 1 we see what Smith, Mill, Ricardo, and Marx have seen before, to wit, wages down―profit up. This fits the time-honored stereotype of wages and profits as antagonists.

However, this situation cannot last for long if profit has been zero in the initial period. In this limiting case, firm 2 makes a loss which is exactly equal to firm 1’s profit. The arbitrary wage rate cut of firm 1 does not increase the profit for the business sector as a whole but only REDISTRIBUTES it.

Seen from the perspective of a single firm, the antagonism of wages and profits is real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off to the disadvantage of firm 2 and the workers of firm 2 are better off to the disadvantage of the workers of firm 1 because at a lower market clearing price they absorb a bigger share of output O with their unaltered income. The situation of the business sector as a whole is unchanged and the same is true for the household sector as a whole. If there is exploitation it happens within the sectors. A partial wage rate change leads only to a redistribution of profits between the firms and of output between the workers.

For the economy as a whole, the classical antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. There is no distributional conflict about output between profits and wages. When classes are defined according to these economic categories the actual conflict materializes within the classes.

When, in the limiting case, there are two groups of workers and two groups of capitalists and the first group of capitalists exploits the first group of workers by slashing the wage rate, then the exploiters OBJECTIVELY act in the interest of the second group of workers whatever their own subjective motives may be. The second group of workers has no economic interest to overcome the wage discrimination of the first group, yet the second group of capitalists has indeed because its profit is indirectly affected. On a deeper level, the relation between the two groups of capitalists is antagonistic. The same holds for the two groups of workers. What looks like exploitation is, in fact, cross-over exploitation within the Marxian classes. This explodes the idea of a 'natural' common class interest.

The myopic agents, workers and capitalists alike, are blind to these interdependencies and therefore prone to the Fallacy of Composition. The generalization of partial effects has the compelling logic of the profit and loss account and the irrefutable empirical evidence of firm 1 on its side. Indeed, what could be more convincing? Wages down, profits up. It works. The invisible redistribution of profit and output is anonymously effected behind the agents’ backs by the market clearing price. Neither capitalists nor workers understand how the market system and the price mechanism works. Neither do economists since Smith, Ricardo,#5 and Marx.#3 Neither does Michael Hudson.

Egmont Kakarot-Handtke

#1 Economics is NOT about Human Nature but the economic system
#2 Economics is NOT a social science
#3 For details see ‘Profit for Marxists
#4 Wikimedia, Pure Consumption Economy
#5 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

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REPLY to MRW on Aug 18

You say: “As far as I’m concerned, you muddle macro- and microeconomics; at least, you muddle American microeconomics in with American macroeconomics.”

I clearly state in Sec. 3 “Fact is that the Walrasian approach = microfoundations and the Keynesian approach = macrofoundations have already been dead in the cradle. … Economic analysis has to be based on entirely new macrofoundations.” In Sec. 5 the MACRO axioms are enumerated.

The muddle is in YOUR head.

You ask: “What do your bêtes noir, wages and profits, have to do with sectoral balances and fiscal policies—US macroeconomic issues the latter of which have not been properly instituted in this country for over 35 years?”

Wage income and profit are the fundamental concepts of economics and economists do not understand the difference between them since Adam Smith and Karl Marx. This has NOTHING to do with US macro. Just like there is no Law of Gravitation for the US, France or China there is NO national Profit Law.

The Profit Law reads in the most elementary case Qm=-Sm and it holds for the world economy as a whole and every single country no matter whether it is capitalist or communist. The scientific concept of law implies universality.

The problem of US macro policy is that US economists do not understand what profit is and how the market economy works. Scientifically, US economists are at Trump University level. The problem of economic policy is always and everywhere the lack of sound scientific foundations.

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REPLY to MRW on Aug 18

You say: “It’s just that I agree with Paul Davidson who says that no US economist has a clue what the Keynesian approach is, that it has never been taught in American universities, and what passes for the ‘Keynesian approach’ is not. It’s in Davidson’s latest book …”

(i) You are right, of course, with regard to Samuelson’s synthesis and all that followed from it.#1
(ii) Keynes’s approach, though, has been already formally defective in the GT.#2
(iii) Davidson has not realized Keynes’s foundational blunder until this very day.#3,#4

#1 The father of modern economics and his imbecile kids
#2 How Keynes got macro wrong and Allais got it right
#3 Why Post Keynesianism Is Not Yet a Science
#4 Post Keynesianism, too, is proto-scientific rubbish

August 16, 2017

Fixing the loanable funds blunder

Comment on Lars Syll on ‘Krugman and Mankiw on loanable funds — so wrong, so wrong’

Blog-References

The loanable funds theory, as presented since time immemorial in the textbooks, is proto-scientific rubbish. There is no use at all to discuss one more time what Krugman or Mankiw have to say about the issue. As a matter of principle, constructive Heterodoxy does not waste time on criticizing the incompetence of Orthodoxy but fixes matters.

So, let us first put the elementary mathematics of accounting right. At first, we have only the business- and the household sector.#1 The two sectoral balances are given as follows:
Qm≡C-Yw    i.e profit Qm is household sector’s spending C minus wages Yw.
Sm≡Yw-C    i.e saving Sm is wage income Yw minus consumption expenditures C.
Qm+Sm=0    or Qm=-Sm

The business sector’s monetary profit Qm is equal to the household sector’s dissaving. This is the most elementary form of the Profit Law.

For a start, the household sector’s budget is balanced, i.e. C=Yw, hence profit is zero.

Money is needed by the business sector to pay the workers who receive the wage income Yw per period. Money is provided by the central bank in the form of deposits. The average stock of transaction money is given as M=kYw, with k determined by the payment pattern. In other words, the ‘quantity of money’ M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank in the form of deposits and overdrafts which are always equal. The economy never runs out of money. The idealized transaction pattern is shown on Wikimedia.#2

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. The business sector’s transaction pattern is the exact mirror image. Money, that is, deposits at the central bank is continually created and destroyed during the period under consideration.

Now, the government sector GS is added. The three sectoral balances are given as follows:
Qm≡C+G-Yw     profit Qm is HS and GS spending C+G minus wages Yw.
Sm≡Yw-T-C       saving Sm is wage income Yw minus taxes T and expenditures C.
Bm≡T-G            budget surplus Bm is taxes T minus government expenditures G.
Qm+Sm+Bm=0   or Qm=-Sm-Bm

The business sector’s monetary profit Qm is equal to the household sector’s dissaving plus the government sector’s budget deficit. For a start, taxes T are set to zero and the household sector’s budget is balanced, i.e. C=Yw, i.e Sm=0. In this case, the business sector’s profit is equal to the government’s deficit, i.e. Qm =-G.

The combined transaction pattern of the household- and the government sector is shown on Wikimedia.#3

The transaction pattern of the business sector is the exact mirror image. So, while the government sector ends up with overdrafts, the business sector ends up with deposits of equal magnitude.

Positive/negative balances are the interface between the sphere of production and the financial sphere.

Let us call the deposits loanable funds then it can be said that the ‘supply of loanable funds’ is always quantitatively equal to the ‘demand’. At the end of the period, the accounts of the central bank ― which has created the money for deficit spending out of nothing ―, the business sector, and the government sector look as shown on Wikimedia.#4

The government’s deficit spending causes an increase of the financial assets of the business sector. At first, the financial asset consists of deposits at the central bank which bear zero interest.

In the second step, the public debt is consolidated by the issuance of long term government bonds or other types of securities. Government securities are offered with a certain maturity and interest rate. In the present case, the business sector is in possession of loanable funds and decides which amount to buy. It is here assumed for simplicity that the whole government debt is consolidated. After the switch from non-interest bearing deposits to interest bearing bonds, the newly created money vanishes again and the accounts look as shown on Wikimedia.#5

Note that the creation of deposits/overdrafts, i.e. money, is temporally disconnected from the consolidation. The long term financing of a government deficit may happen before or after the spending has taken place.

As a matter of principle, the ‘supply of loanable funds’ = deposits is always QUANTITATIVELY equal to the ‘demand’ = overdrafts.

Matters are analogous with household sector saving and business sector investment. In this case, the monetary profit of the business sector is given by Qm≡I-Sm. By consequence, the increase of loanable funds of the household sector is given by monetary saving Sm and that of the business sector by Qm. The total financing requirement, on the other hand, is given by I.#6 The most important thing to notice is that business sector’s investment expenditure I and household sector’s saving Sm is NEVER equal. To assume that the interest rate equalizes both magnitudes is the lethal blunder of the familiar loanable funds approach.#7

Egmont Kakarot-Handtke

#1 The pure consumption economy is defined by the macro axiom set: (A0) The objectively given and most elementary configuration of the 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. For a start X=O.
#2 Wikimedia, Transaction pattern C=Yw
#3 Wikimedia, Transaction pattern C+G greater than Yw
#4 Wikimedia, Government deficit spending, creation of money
#5 Wikimedia, Government deficit spending, consolidation
#6 For details see ‘Squaring the Investment Cycle
#7 For more details see cross-references Refutation of I=S and cross-references Debt


Related 'Loanable funds ― no hoax, just breathtaking stupidity' and 'Say hello to Lars Syll, Keynes’s last parrot' and 'A new episode of one of the worst blunders of economics' and 'Macrofoundations, too, are defective' and 'Loanable funds, lack of scientific firepower and abundance of political fartpower' and 'Enough! Economists, retire now!' and 'Ending the economic Froschmäusekrieg a.k.a. Batrachomyomachia' and 'Not a question of simplicity but of stupidity' and 'How economic thinkers think they think about interest'

August 15, 2017

Advancing to the correct multiplier

Comment on Peter Cooper on ‘Short & Simple 16 ― The Expenditure Multiplier and Income Determination’

Blog-Reference

Peter Cooper states: “We have seen that total spending equals total income. It has been argued that it is spending that creates (or determines) income. This can be inferred from the observation that some spending can occur independently of income. Spending that occurs independently of income is called autonomous spending. … Examples of autonomous spending are: government spending; autonomous private consumption; private investment; exports.”

We have proven that the statement ‘total spending equals total income’ is false.#1 By consequence, the whole formal apparatus of MMT is defective. This, of course, affects also the multiplier.

The elementary version of the correct (objective, systemic, behavior-free, macrofounded) employment equation is shown on Wikimedia.#2

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (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.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, the public sector, and foreign trade.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism.

The correct employment and income multiplier consists of TWO components, the expenditure ratio rhoE and the factor cost ratio rhoF.#3 The latter component is missing in the familiar approaches which leads to wrong policy prescriptions.

Egmont Kakarot-Handtke

#1 For the full-spectrum refutation of MMT see cross-references
#2 For details see 'Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster'
#3 For more details see cross-references Employment

Profit and the decline of labor’s nominal share

Comment on Asher Schechter on ‘The Rise of Market Power and the Decline of Labor’s Share’

Blog-Reference and Blog-Reference on Aug 16

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: economists have NO idea what the pivot of their subject matter is.#1

It is pretty obvious that without the true profit theory there is no true distribution theory.#2 In order to arrive at the true profit theory, the analysis has to let the false Walrasian microfoundations and the false Keynesian macrofoundations behind and to be based on the correct macrofoundations.#3

For the pure consumption economy then follows:
Qm≡C-Yw, i.e profit Qm is household sector’s spending C minus wages Yw.
Sm≡Yw-C, i.e saving Sm is wage income Yw minus consumption expenditures C.
Qm+Sm=0 or Qm=-Sm

The business sector’s monetary profit Qm is equal to the household sector’s dissaving. This is the most elementary form of the Profit Law. From this relationship follow some essentials about profit for the economy as a whole:
• The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
• Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit maximizing behavior or on markup setting.
• 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. This presupposes the existence of a credit creating entity.
• Profit/loss is, in the most elementary case, determined by the increase and decrease of household sector’s debt.
• Monopoly power is irrelevant for total profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
• There is no relation at all between profit, capital, marginal or average productivity.
• 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.
• 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. Microfounded profit theory is one big fallacy of composition.

The axiomatically correct Profit Law is given for the general case as Qm≡Yd+(I-Sm)+(G-T)+(X-M) and reduces to Qm≡(I-Sm)+(G-T) for Yd, X, M = 0; Legend: Qm total monetary profit, Yd distributed profit, Sm monetary saving, G government expenditures, T taxes, X exports, M imports.

The nominal labor share l is defined as quotient of wage income Yw and the sum of wage income and monetary profit Qm, that is, l≡Yw/(Yw+Qm)=1/(1+Qm/Yw).

It is pretty obvious now that market power cannot account for a falling nominal labor share l. The main drivers of increasing overall profit have been in the past decades the increasing debt of the household- and the government sector.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 See also ‘Essentials of Constructive Heterodoxy: Profit
#3 (A0) The objectively given and most elementary configuration of the 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. For a start X=O.


For details of the big picture see cross-references Profit

Economics: a "science" from suckers for suckers

Comment on Sandwichman on ‘The “Narratives” of Higgins’s “Warfare”’

Blog-Reference and Blog-Reference

Economists claim to do science and communicate this every year to the general public with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. Whether the claim to be a science is self-delusion or fraud does not matter much. Fact is:
• the profit theory is false since 200+ years,
• Walrasian microfoundations (including equilibrium) are inconsistent since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM) are inconsistent since 80+ years.

Economics is a failed science or what Feynman called a cargo cult science. Fact No 1: There are opinion and brain-dead blather. This is called politics. There are knowledge and proof. This is called science. Fact No 2: Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Fact No 3: Political economics has produced NOTHING of scientific value in 200+ years. Fact No 4: Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory, axiomatically false, and materially/formally inconsistent. Fact No 5: Economists are quite content with the pluralism of false theories, they do not have any real scientific ambitions. Fact No 6: Economics is a cargo cult science from suckers for suckers. Fact No 7: Economic debates between orthodox and heterodox economists or between left-wingers and right-wingers are ALWAYS inconclusive and not more than an intellectual Pygmy wrestling show.

These are the recent topics at the EconoSpeak blog:
• The “Narratives” of Higgins’s “Warfare” (cultural Marxism, Frankfurt School, Marcuse’s Repressive Tolerance, Breivik’s Manifesto, Hitler’s Mein Kampf)
• “Rational” Optimism? (realized material benefits, risks of catastrophic climate change, nuclear war)
• The Buchanan-MacLean Controversy (socialism, racial segregation, Austrian libertarianism, Mont Pelerin Society, neoliberalism, Koch brothers, Trump, climate change denial, Hayek-Friedman-Pinochet, Stalin, Hitler, Mao, Kim Il Sung, public choice theory, corrupt government agencies, rent seeking, crushing labor unions, Murray Rothbard, Ludwig von Mises).
• The Higgins Memo, Anders Breivik and the Lyndon LaRouche Cult (Lunatic fringe, Norway mass murder, White Christian Nationalism, Multiculturalism, White House, Foreign policy)
• The Financial Crisis Tenth Anniversary (Bubbles, FED-ECB actions, bail-outs, collateral Euro near-crash)
• Avik Roy Claims Reagan Embraced Universal Health Care Coverage

All this is sociology, philosophy, politics, folk psychology or gossip. There is not one iota of science or consistent theoretical economics. To recall, theoretical economics is supposed to figure out how the economy works just like physics is supposed to figure out how the universe works.

Entrance is free in politics and every sucker can climb on a soap box and demand tax cuts or tell something about liberty and democracy. The entrance to science is only free for those who are able and committed to advance scientific knowledge. Until now economics could not get the suckers off its back. That is why it is still at the proto-scientific stage.

It is pretty obvious that EconoSpeak is not committed to anything else than political blather. But, then, what is to be expected from proto-scientific storytellers like Sandwichman, ProGrowthLiberal, Peter Dorman, and Barkley Rosser.*

Needless to emphasize that the other economics blogs are not any better.

Egmont Kakarot-Handtke

* See also ‘Fact of life: your econ prof is scientifically incompetent


Related 'In search of new economists' and 'Barkley Rosser, petty scientist' and 'Economics between cargo cult, farce, and fraud'

August 14, 2017

Walrasian micro and Keynesian macro need to be flushed away

Comment on Bradford DeLong on ‘Micro Needs Macro’

Blog-Reference and Blog-Reference

This is the track record of economics: provably false
• profit theory, since 200+ years,
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM), since 80+ years.
The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. The representative economist, though, has not noticed anything.#1

What the representative economist should, but cannot, understand is that nothing less than a paradigm shift is required. Economics does not need a ‘new’ thinking of renowned orthodox and heterodox proto-scientific suckers but a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to the true macrofoundations. Nothing less will do.

The enthusiasm of failed suckers for New Economic Thinking cannot be taken seriously.#2 Time to get rid of scientifically worthless economics and failed/fake scientists who get nothing right since 200+ years.#3

The first rule of economic methodology says: If it isn’t macro-axiomatized, it isn’t economics.#4

Egmont Kakarot-Handtke

#1 Fact of life: your econ prof is scientifically incompetent
#2 New Economic Thinking, or, let’s put lipstick on the dead pig
#3 In search of new economists
#4 First Lecture in New Economic Thinking

August 12, 2017

Barkley Rosser, petty scientist

Comment on Barkley Rosser on ‘The Financial Crisis Tenth Anniversary’

Blog-Reference

Economics is a failed science or what Feynman called a cargo cult science. Needless to emphasize that the general public cannot tell the difference between genuine science and cargo cult science. Feynman defined the latter as follows: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.” What is missing is scientific competence.

There are some typical identifiers for the cargo cultic economist.

(i) Barkley Rosser, as a prime example, maintains that science is about predicting the future: “As one of those who analyzed what was going on better than most and with better timing, …, which analyzed what had been happening and forecast a full-out crash coming soon, which indeed occurred a bit over two months later.” and “Needless to say, I have praised her [Janet Yellen] forecasting abilities on several occasions, and she was calling the housing bubble from 2005 on.”

As a matter of principle — science is NOT AT ALL in the business of prediction because it is long known among scientists: “The future is unpredictable.” (Feynman)#1 Only charlatans predict the future, and only morons take them seriously.

(ii) Barkley Rosser cannot tell the difference between prophecy and a scientific ‘prediction’. The latter is a conditional proposition which presupposes: (i) the exact knowledge of initial conditions, (ii) the knowledge of one or more universal laws, (iii) the absence of disturbances. (Popper)

Scientific ‘prediction’ presupposes the true theory. Economists, though, lack the true theory. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent.

For lack of the true theory, economic prediction is an exercise which is in no way different from the poultry entrails reading of the old Roman haruspex.

(iii) Barkley Rosser does not know how the actual market economy works. He does not even know what profit ― the foundational concept of all of economics ― is.#2

(iv) Barkley Rosser represents the wrong type of economics. There are TWO economixes: political economics and theoretical economics. The main differences are: (a) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (b) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

As a political economist, Barkley Rosser routinely violates scientific standards. His economic policy assessments and proposals do not follow from a valid theory because there is none.

(v) Political economics degenerates quite naturally to proto-scientific inconclusive blather, pure gossip about colleagues, celebrities or political figures, and sitcom reputation management with vacuous euphemism/slander.

The lack of scientific knowledge is compensated for by the hint to piles of hot and exclusive insider knowledge: “There is so much more I have to say about all this, but these are a few items that either were not well known at the time or have been largely forgotten since.”

Political economics is essentially storytelling of the ‘throng of superfluous economists’ (Joan Robinson).#3

Egmont Kakarot-Handtke

#1 Scientists do not predict
#2 Economists: scientists or political clowns?
#3 Fact of life: your econ prof is scientifically incompetent


Related 'In search of new economists' and 'Economics and Project Augean Stable'. For details of the bigger picture see cross-references Incompetence and cross-references Political economics.

MMT and the magical profit disappearance

Comment on Peter Cooper on ‘Short & Simple 15 – The Sectoral Balances Identity’

Blog-Reference

Peter Cooper summarizes: “This is the sectoral balances identity. In words:
Domestic Private Balance + Government Balance + Foreign Balance = 0

The balances of the three sectors cancel each other out. … The result can be aggregated a bit more by combining the domestic-private and foreign sectors into the Non-Government Sector. The identity then becomes:
Non-Government Balance + Government Balance = 0

… If the non-government manages to maintain a financial surplus, then by definition the government will be running a deficit. In doing so, non-government will accumulate net financial assets over the period and increase its stock of net financial wealth.”

Let us put the accounting right.#1, #2 At first, we have only the business- and the household sector. The two sectoral balances are given as follows:

Qm≡C-Yw   i.e profit Qm is household sector’s spending C minus wages Yw.
Sm≡Yw-C    i.e saving Sm is wage income Yw minus consumption expenditures C.
Qm+Sm=0    or Qm=-Sm

The business sector’s monetary profit Qm is equal to the household sector’s dissaving. This is the most elementary form of the Profit Law.

Now, the government sector GS is added. The three sectoral balances are given as follows:

Qm≡C+G-Yw  profit Qm is HS and GS spending C+G minus wages Yw.
Sm≡Yw-T-C    saving Sm is wage income Yw minus taxes T and expenditures C.
Bm≡T-G         GS budget surplus Bm is taxes T minus government expenditures G.
Qm+Sm+Bm=0 or Qm=-Sm-Bm

The business sector’s monetary profit Qm is equal to the household sector’s budget deficit a.k.a. dissaving and the government sector’s budget deficit.

For three sectors, proper accounting yields three sectoral balances which add up to zero. Now MMT does not stop here but fiddles with the balances as follows:

(i) Qm+Sm+Bm=0, (ii) Qm+Sm=-Bm=G-T, (iii) non-government balance = government balance. Business sector profit/loss and household sector dissaving/saving are verbally lumped together to non-government balance and thereby vanish out of sight.

Why does MMT make profit disappear with this accounting shell game? Let Sm be zero, that is, the household sector’s budget is balanced, then (ii) says that the business sector’s profit is equal to the government sector’s deficit, i.e. Qm=G-T. While (iii) says that the non-government balance is equal to the government sector’s deficit.

Why MMT “aggregates” the business and the household sector is at anybody’s guess. Formally it is inadmissible, that much is clear. The destruction of valuable information is NOT the purpose of accounting, just the opposite.

Egmont Kakarot-Handtke

#1 Economists: just too stupid for counting
#2 The pure consumption economy is defined with the macro axiom set: (A0) The objectively given and most elementary configuration of the 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. For a start X=O.


For the point-by-point refutation of MMT see cross-references. For the accounting blunder, in particular, see cross-references Accounting.

***
LINK on Aug 12

Peter Copper asserts: “The accounting identities are indisputable (provided we accept the principles of accounting).”

MMT violates the principles of accounting. For details see ‘MMT and the magical profit disappearance
***

REPLY to Matt Franko on Aug 13 and to Dean on Aug 14

Peter Copper asserts: “The accounting identities are indisputable (provided we accept the principles of accounting).”

Fact is
• accounting is elementary mathematics,
• MMTers do not understand the underlying math of accounting,#1
• the accounting equations of MMT are provably false,#2
• these are the correct accounting identities:

Qm≡C+G-Yw    profit Qm, business sector
Sm≡Yw-T-C      saving Sm, household sector
Bm≡T-G           budget surplus Bm, government sector
Qm+Sm+Bm=0,

• for THREE sectors, proper accounting yields THREE sectoral balances which add up to zero,
• it is either mathematical incompetence or fraud that profit does not appear in the MMT accounting identities,
• Peter Cooper violates the principles of accounting.

Take away: As far as Peter Copper only parrots Bill Mitchell and Randall Wray the charge of scientific incompetence applies to these spokespersons of MMT.#3

#1 A tale of three accountants
#2 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#3 For the full-spectrum debunking of MMT see cross-references

***
REPLY to Dean on Aug 15

You say: “Yeah, I'm not arguing with anyone on the underlying math of accounting … all I really care about is proving to those that matter that its not mathematically possible for everyone to be solvent …”

There are opinion and brain-dead blather. This is called politics. There are knowledge and proof. This is called science.

MMT belongs to the first category. Peter Cooper’s discussion about the sectoral balance identity demonstrates beyond any doubt that MMT is economics from suckers for suckers.

Note that you contradict yourself in one sentence. You care about proof but not about the underlying mathematics of accounting. What does your proof, then, consist in?

August 11, 2017

In search of new economists

Comment on Benjamin Friedman on ‘The Search for New Assumptions

Blog-Reference and Blog-Reference

Economics is a failed science. But economists were not only unable in the past 200+ years to figure out how the market economy works they are also unable to realize that the only thing that they can do for the progress of economics and the welfare of humanity is to retire.

The utter self-delusion of economists consists in the idea of New Economic Thinking. This is absurd. People who have proven their scientific incompetence by clinging to assumptions that were already dead in the cradle 140+ years ago and who cannot even get the elementary mathematics of accounting right lack the capacity of thinking altogether.#1 Joan Robinson called them the ‘throng of superfluous economists’. To suggest New Thinking to the representative economist is like suggesting pole-jumping to someone who cannot make two steps without falling over his own feet.

Fact is that the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and that ALL got the pivotal economic concept profit wrong.#2

The only thing that works fine in economics is the survival strategy. Confronted with an economic crisis and the obvious failure of standard economics, economists readily admit/justify everything and enthusiastically promise New Thinking.#3 New Thinking, though, consists only in a repacking of the old junk.

As Krugman put 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.” More specifically, the 140+ years old starting point consists of this set of 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)

It should be pretty obvious that the axiomatic core of Orthodoxy 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. Fact is that the dimwitted Krugmen have not realized this until this very day. The chances that they will understand anything better in the future are zero. The same holds for Keynesians, Marxians, Austrians, and Pluralists.

Benjamin Friedman sums up: “Without assumptions there is no theory, and without theory there is no analysis. Whether macroeconomists will be willing to find new assumptions on which to base their ideas, leaving behind the ones that straight-jacketed their thinking during the crisis, will largely determine whether the discipline will regain the usefulness it once seemed to have.”

Benjamin Friedman, too, is a proto-scientific wish-washer. Translated into proper methodological terms, this is the case: Without true axioms there is no true theory and without true theory economists have NOTHING WORTHWHILE to say: “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)

Scientific truth is since 2000+ years well-defined by material and formal consistency: “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.” (Aristotle)

Economics does not need ‘new assumptions’ but a paradigm shift from false Walrasian microfoundations and false Keynesian macrofoundations to the true macrofoundations. Nothing less will do.#4

Economics is a science without scientists. The present generation of ― orthodox and heterodox ― economists have disqualified themselves and cannot make a significant contribution to the discussion about how the actual economy works. Their chances of New Economic Thinking have been wasted long ago.

Egmont Kakarot-Handtke

#1 Fact of life: your econ prof is scientifically incompetent
#2 How the intelligent non-economist can refute every economist hands down
#3 Failed economics: The losers’ long list of lame excuses
#4 First Lecture in New Economic Thinking

August 10, 2017

Sending Solow’s growth model to the dump of proto-scientific history

Comment on Luis C. Corchón on ‘A Malthus-Swan Model of Economic Growth’

Blog-Reference

Economics fits Feynman’s definition of a cargo cult science: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Orthodox economics messed up the theory of production. Georgescu-Roegen was quite clear about “… the completely faulty form by which standard economics represents a production process”. As a consequence, all growth models of the Solow-type since the QJE paper of 1956 are worthless. But the problem goes deeper. All microfounded models are worthless.

The whole theoretical superstructure of Orthodoxy is based upon this set of 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)

In order to be applicable HC2, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function. The compelling reason for the introduction of out-of-thin-air auxiliary assumptions is that without these specifications the axiom HC2 does NOT work and the whole of Marginalism, which hinges on HC2, falls apart.

It should be pretty obvious that the axiomatic core of Orthodoxy 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. This includes all Solow-type models.

Economics has to start — NOT with behavioral assumptions — but with the ‘monetary theory of production’ (Keynes). The pure consumption economy is defined with systemic (= behavior-free) axioms: (A0) The objectively given and most elementary configuration of the 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.

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimal, that is, it cannot be reduced further, only expanded. The set contains no nonentities like maximization or equilibrium and no normative assertions. Note that all variables are measurable.

For a start, it holds: market clearing X=O and budget balancing C=Yw.

Monetary profit is defined as Qm≡C-Yw and monetary saving is defined as Sm≡Yw-C. It always holds Qm+Sm=0 or Qm=-Sm, which is the most elementary form of the Profit Law.

Under the conditions of market clearing and budget balancing in each period the price follows as P=W/R, i.e. the market clearing price is always equal to unit wage costs. This is the most elementary form of the Law of Supply and Demand. It translates into W/P=R, i.e. the real wage is always equal to the productivity.

The changes of the wage rate from period to period are formally given by Wt=Wt-1(1+wt). Analogous for all other independent variables. The rates of change for future periods are, for a start, taken to be random variables.

With this, the formal framework of the elementary growth model for the pure consumption economy is defined. The systemic formal framework#2, which combines the nominal and real key variables, fully replaces all Solow-type real models.

It does not matter how employment develops, that is, whether the labor force grows or shrinks over time. If the productivity remains constant with growing (shrinking) employment the real wage does not change. If the productivity increases so does the real wage. Labor gets always their full product. Monetary profit is zero. If the productivity declines the real wage heads towards the subsistence level. This, though, has nothing to do with exploitation. Needless to say that at the subsistence level all further expansion comes to a halt. This is the Malthusian outcome. The ultimate driver of real affluence is increasing returns.

This was the first step. In the second step investment and capital have to be added.#3

Egmont Kakarot-Handtke

#1 The future of economics: why you will probably not be admitted to it, and why this is a good thing
#2 The Economics God Equation (including distribution) is shown on Wikimedia
#3 Squaring the Investment Cycle

Loanable funds ― no hoax, just breathtaking stupidity

Comment on Lars Syll on ‘The loanable funds hoax’

Blog-Reference and Blog-Reference and Blog-Reference on Aug 12

Lars Syll states: “In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate. Lowering households’ consumption means increasing savings that via a lower interest. That view has been shown to have very little to do with reality. It’s nothing but an otherworldly neoclassical fantasy.”

This, of course, is true. Anytime an economist paints supply-curve—demand-curve—equilibrium it is proto-scientific junk, no matter what is written on the axes.#1 The standard analytical tool, i.e. SS-curve―DD-curve―intersection, represents a NONENTITY. By consequence, any supply-demand-equilibrium discussion is as senseless as any dancing-angels-on-a-pinpoint discussion.

Lars Syll’s critique of the loanable funds theory is correct on all scores. The problem, though, is that BOTH orthodox and heterodox economists are scientifically incompetent. The proof is in the fact that heterodox alternatives are regularly just as crappy as the orthodox original. They look only different at the surface level.

Lars Syll quotes Kalecki approvingly: “It should be emphasized that the equality between savings and investment … will be valid under all circumstances. In particular, it will be independent of the level of the rate of interest which was customarily considered in economic theory to be the factor equilibrating the demand for and supply of new capital.”

Kalecki, of course, is wrong. Saving and investment are NEVER equal, neither ex-ante nor ex-post. Keynes, of course, got it also wrong: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (GT, p. 63)

In order to prove this, one has to go back to the basics of what Keynes called ‘the monetary theory of production’. The pure consumption economy is for a start defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit Qm≡C-Yw, monetary saving Sm≡Yw-C).#2

It always holds Qm+Sm=0 or Qm=-Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. It implies that saving and investment are NOT equal, simply because there is no investment in the pure consumption economy but there is saving/dissaving.#3

So, Kalecki is refuted, Keynes is refuted, and all the rest of the IS-LM crowd up to Krugman is refuted.#4

For the investment economy holds Qm≡I-Sm. The DIFFERENCE between investment and saving, which exists at ANY moment on the time axis determines monetary profit Qm, which is measurable with the accuracy of two decimal places.

The orthodox loanable funds theory is false but the heterodox alternatives are also false. Economists are too stupid for elementary algebra.#5 This is NOT a hoax, this is real.#6

Egmont Kakarot-Handtke

#1 There is NO such thing as supply-demand-equilibrium
#2 The tiny little problem with economics
#3 See also ‘Macro for dummies
#4 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#5 Economists: just too stupid for counting
#6 Fact of life: your econ prof is scientifically incompetent


Related 'Fixing the loanable funds blunder'. For details of the big picture see cross-references Refutation of I=S

August 9, 2017

Economists: only good at excuses

Comment on Brian Romanchuk on ‘Rigour and Macroeconomics’

Blog-Reference

Brian Romanchuk introduces himself: “Much of my writing about macroeconomic theory is of the hand-wringing variety: it cannot be ‘scientific’ because (useful) forecasting is essentially impossible to do.”

This one sentence is enough for scientific self-debunking. Economics is a cargo cult science because economists never understood what science is all about. Proof No 1: like the average commonsenser, economists maintain erroneously that science is about predicting the future.

John Kay, for example, explains why this does not work in economics: “Big data can help us understand the past and the present but it can help us understand the future only to the extent that the future is, in some relevant way, contained in the present. That requires a constancy of underlying structure that is true of some physical processes but can never be true of a world … in which important decisions or discoveries are made by processes that are inherently unpredictable and not susceptible to quantitative description.”

This so trivial that it hurts and, above all, it is entirely beside the point. It is not a specific failure of economics that it cannot predict the future because — as a matter of principle — science is NOT AT ALL in the business of prediction because it is long known among scientists: “The future is unpredictable.” (Feynman)#1 Only charlatans predict the future, and only morons take them seriously.

The first thing to understand is that science is NOT about prediction but about knowledge. So, to begin with, things that are not knowable are a priori OUT of science. Scientific knowledge satisfies two criteria: material and formal consistency. Everything else is storytelling, sitcom blather, clueless filibuster, and hand waving.

Scientific knowledge is embodied in the true theory. The true theory is the best possible mental representation of reality.

Economists do not have the true theory and the representative economist does not realize that the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and that ALL got the pivotal economic concept profit wrong.

The representative economist is content with the pluralism of provably false theories and he simply tries to explain/excuse manifest failure away.#2 The recurring key words are complexity, non-ergodicity, radical uncertainty, emergence, novelty, spontaneity of human behavior, and so on and on.

Economists do not understand that their subject matter is ill-defined. Economics is NOT a social science but a system science. The lethal methodological defect of economics is that it is microfounded, that is, based on behavioral axioms. Now it holds that (1) there is NO such thing as an invariant of human behavior, and (2), NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works.

Economics is NOT AT ALL about Human Nature/motives/behavior/action. This is the subject matter of psychology, sociology, anthropology, history, political science, biology, etc. Economics is about the economic system and objective systemic laws.#3

The ultimate proof of utter scientific incompetence is that neither orthodox nor heterodox economists have gotten the foundational concepts of their subject matter ― profit and income ― right. This is embarrassing, laughable, and inexcusable.

Economics has to be macrofounded and this requires the full replacement of false Walrasian microfoundations and false Keynesian macrofoundations.#4 Economics is not a science until this day because economists are nothing but cargo cultic blatherer.#5, #6

Egmont Kakarot-Handtke

#1 Scientists do not predict
#2 Failed economics: The losers’ long list of lame excuses
#3 First Lecture in New Economic Thinking
#4 Macro for dummies
#5 Economists: scientists or political clowns?
#6 With regard to MMT, in particular, see cross-references

There is NO such thing as supply-demand-equilibrium

Comment on Gavin Kennedy on ‘Paul Samuelson’s awesome error’

Blog-Reference and Blog-Reference on Aug 10

Gavin Kennedy summarizes: “I don’t think that anything Smith wrote can be credited to his anticipation of Nash Equilibrium - thought some modern economists (post-Samuelson) appear to think he did, even beyond Nash Equ. 1 to Nash Equ, 2. I am not sure that outside the models, Equilibria exists in the real world. I have long been suspicious about the basic Supply and Demand equilibrium exemplified in the Marshallian Supply and Demand diagram. I understand its construction, of course, but when I try to envisage its operation in a real market-stall, I am flummoxed!”

Everybody with one iota of scientific instinct immediately realizes that there is something fundamentally wrong with supply-demand-equilibrium and the SS-curve―DD-curve― intersection which is the analytical workhorse of standard economics. Leijonhufvud ironised this construct as totem of the micro/totem of the macro. And already Schumpeter found it necessary to diffuse doubts about the scientific content of the supply-demand-equilibrium approach: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”

Orthodoxy is since 140+ years built upon false premises. The microfoundations approach is defined with these 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)

It should be pretty obvious that the Walrasian hard core contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). To take equilibrium into the premises and then to establish and discuss the properties of general equilibrium is a methodological blunder that is known since antiquity as petitio principii.

Because the axioms of orthodox economics are false the whole analytical superstructure, including supply-demand-equilibrium, is false. What has to be done is to replace false microfoundations by true macrofoundations. This paradigm shift fundamentally changes the depiction of the market. The new prototype which replaces SS-curve―DD-curve― equilibrium is shown on Wikimedia.#1, #2

Loosely speaking, Orthodoxy defines itself as follows “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)#3 This is bad enough, but that Heterodoxy could not refute and replace this plain proto-scientific garbage in 140+ years shows the abyss of scientific incompetence in its bottomless depth.

Egmont Kakarot-Handtke

#1 Wikimedia, The market prototype
#2 Essentials of Constructive Heterodoxy: The Market
#3 The father of modern economics and his imbecile kids


Related 'Ground Control to David Glasner' and 'Petitio principii — economists’ biggest methodological mistake' and 'Why you should NEVER use supply-demand-equilibrium' and 'Traditional Heterodoxy’s paradigmatic impotence' and 'All models are false because all economists are stupid' and 'The Law of Supply and Demand: Here It Is Finally' and 'How to Get Rid of Supply-Demand-Equilibrium' and 'How to overcome the manifest silliness of Econ 101 and save the economy'