May 28, 2017

First Lecture in New Economic Thinking

Comment on Barkley Rosser and Sandwichman on ‘Fighting Zombies with Zombies’

Blog-Reference

1. How Walrasians got it wrong

The microfoundations approach is based on methodological individualism and clearly defined by 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)

The Walrasian approach comes in several variants and a loose definition has been given by Krugman: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

The Walrasian axioms = microfoundations are methodologically unacceptable.#1 Because the axiomatic foundations are false the whole analytical superstructure is false. Walrasian economics is scientifically worthless. Scientific truth is defined by material and formal consistency. Sorta-kinda neoclassical or mainstream economics lacks both.

2. How Keynesians got it wrong

Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

This elementary syllogism is conceptually 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.)

Because the formal core of Keynesianism is false the whole analytical superstructure including all I=S, IS-LM and New Keynesian models is false.#2 All variants of Keynesian economics are scientifically worthless.

3. How Marxians, Austrians, and Pluralists got it wrong

The rest of approaches is either not properly axiomatized, that is, the premises are never explicitly stated or consist of an inconsistent combination of Walrasian, Keynesian, and plucked-out-of-thin-air elements. Approaches without clearly stated and consistent premises are scientifically worthless. This applies to ALL of political economics and to ALL psychological/sociological/historical/Human Nature storytelling.

4. Rectification

The Keynesian premises are methodologically superior because they are behavior-free and objective-systemic. Since they are defective with regard to the definition of income/profit they have to be replaced by the correct macrofoundations.

(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.

For the graphical representation of this ABSOLUTE formal MINIMUM see Wikimedia.

5. Proofs

(i) The sector balances (Sm≡Yw-C, Qm≡C-Yw) always add up to zero, i.e. Qm+Sm,=0 or Qm=−Sm, that is, the business sector makes a monetary profit Qm which is equal to the household sector’s dissaving −Sm or a loss which is equal to saving. From this immediately follows that saving and investment are NEVER equal, neither ex-ante nor ex-post, and ALL Keynesian and Post Keynesian models are provably false.#3

(ii) By expansion of the absolute formal minimum, the profit equation expands to Qm=Yd+(I−Sm)+(G−T)+(X−M). This is a testable proposition because all variables are measurable.

(iii) By expansion of the absolute formal minimum, the employment equation expands also. See on Wikimedia. This is a testable proposition because all variables are measurable.#4

The successful test of propositions that have been logically derived from a consistent axiom set corroborates the axioms: “Whether an axiom is or is not valid can be ascertained either through direct experimentation or by verification through the result of observations, or, if such a thing is impossible, the correctness of the axiom can be judged through the indirect method of verifying the laws which proceed from the axiom by observation or experimentation.” (Morishima)

6. Conclusion

Your comments are another instance of brain-dead blather and utter scientific incompetence.

Egmont Kakarot-Handtke

#1 For detailed arguments, proof, and references see axecorg.blogspot.de
#2 For details see ‘How Keynes got macro wrong and Allais got it right
#3 For details see ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#4 For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

Immediately preceding 'What is the fuss with New Economic Thinking all about?'

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REPLY to Barkley Rosser on May 29

You say: “you have added another fundamental axiom you do not mention in a bunch of the (mostly justifiably unpublished) papers by you that you cite, this A0.”

A0 is a verbal description of what the three following equations refer to. It is NOT an axiom. A0 invokes a picture of the pure production-consumption economy. The zero clearly indicates that it is NOT counted as an axiom.

ALL macro deals with the abstraction of one firm. National accounting in effect aggregates all firms to one firm by eliminating the transactions between them. Keynes’s foundational propositions as given above also refer to one firm=business sector.

Your argument: “It is not now and never has been ever and never will be true that the world economy operates or has operated via a single business enterprise …” is the badge of the moronic realist since science was invented by the ancient Greeks. Just like ‘triangle’ is an idea, the ‘economy’ is an idea. So-called realists do not understand until this day what Plato and Pythagoras meant with idea (see Wikipedia).#1

When Newton laid down the first axiom of motion, i.e. “… an object either remains at rest or continues to move at a constant velocity …” (see Wikipedia), the moronic realist or what J. S. Mill called the bigot of common sense exclaimed: “It is not now and never has been ever and never will be true” that bodies move at constant velocity. And this is what J. S. Mill told the Barkley Rossers' and Sandwichmen of his time: “It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”#2

You say: “All this does is make you even more in trouble with Einstein.” Not at all, I am in perfect accordance with Einstein: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.”#3

One firm is obviously the “not logically further reducible… indispensable and not rationally deducible part of the theory.”

I am not only in perfect accordance with Einstein, but, even better, with the great economist and methodologist J. S. Mill: “They [Einstein and Dirac] agreed that science was fundamentally about explaining more and more phenomena in terms of fewer and fewer theories, a view they had read in Mill’s A System of Logic.” (Farmelo)

Needless to emphasize that Barkley Rosser and the other Trump University economists have never read/understood A System of Logic.

So I am in perfect accordance with J. S. Mill by characterizing the bigots of common sense as ignorant and scientifically incompetent.

#1 “Though there never were a circle or triangle in nature, the truths demonstrated by Euclid would for ever retain their certainty and evidence.” (Hume)
#2 See also ‘Economics, too, has been almost ruined by the bigots of common sense
#3 See also ‘Warning: Einstein can be hazardous to heterodox methodology

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REPLY to Barkley Rosser on May 30

You say: “There most certainly are objects in constant motion, e.g. the earth going around the sun. Granted it is slowing down very very slowly, but it is close enough to constant for all practical purposes.”

Yes, there are objects with fast and slow motion. Humanity, though, had not to wait for a failed economist like Barkley Rosser to realize this. The point at issue is that Newton (i) took a patently “unrealistic” assertion about motion as the first axiom, and (ii), that Newtonian physics was empirically successful beyond the wildest dreams. Moronic realists or what J. S. Mill called the bigots of common sense did not understand the crucial methodological point then as they do not understand it now: “There is no doubt a strong tendency to revolt against abstract reasoning. Human nature has a strong ‘factish’ element in it. The reasonings of Principia are now accepted. But in the beginning they were ‘mere crotchets of Mr. Newton’s;’ Flamstead, the greatest astronomical discoverer of his day ― the man of facts, par excellence ― so called them; they have irresistibly conquered, but at first even those most conversant with the matter did not believe them.” (Bagehot)

Flamstead, then, can be taken as a perfect example of a moronic realist. The defining difference between the moronic realist and the scientist is that the latter rejects an argument because it is formally/empirically inconsistent but NEVER as “unrealistic”. As Feynman put it: “It does not matter that moos and goos cannot appear in the guess. You can have as much junk in the guess as you like, provided that the consequences can be compared with experiment.” This means for economics that you cannot have NONENTITIES like utility in the premises because NONENTITIES have NO testable consequences. This is why Walrasianism is dead since 140+ years.

The whole discussion about realism or unrealism which is so characteristic for economists is the ultimate proof of their utter scientific incompetence.

You say: “the economy is not an idea. It is a very real thing.” The economy as the subject matter of economics is a mental construct or what Plato called an idea or what may be characterized as idealization/abstraction. A good metaphor for the relationship between idea and reality is that between plan and landscape. An idea/theory must satisfy two criteria in order to be accepted to the corpus of scientific knowledge: material and formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing. The economy is an idea that has to be clearly defined by a set of premises, a.k.a. foundational propositions, a.k.a. axioms. Without clear premises all conclusions are for the wastebasket, the whole argument is scientifically worthless, and policy guidance is useless at best.

The idea of the economy which, respectively, Walrasians, Keynesians, Marxians, Austrians have put forward does NOT satisfy the two criteria of science. All of economics is refuted: “… suppose they [the economists] did reject all theories that were empirically falsified … Nothing would be left standing; there would be no economics.” (Hands)

This is the point to start with: economics is a failed science. Both orthodox and heterodox economics is indefensible and to criticize them is a waste of time: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug) Or: “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

The scientific incompetence of the representative economist consists (i) in still defending theories that have been logically/empirically refuted long ago, and (ii), in the incapacity to fully replace defunct approaches by the true theory.

The economist who does not understand that the actual state of economics is that of a failed science is a moron. The economist who does understand that Walrasianism, Keynesianism, Marxianism, Austrianism, and Pluralism is proto-scientific garbage but still defends one of these approaches and claims to do science is a fraudster.

The three career paths of the economist are currently: (i) moron, (ii) fraudster, or (iii) paradigm shifter. Neither you nor Sandwichman nor the rest of your Trump University colleagues belongs to group (iii), i.e. the scientific elite.

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REPLY to Barkley Rosser on Jun 2

You say: “So, the problem is not profit theory and the failure to distinguish retained profits from distributed ones, it is capital theory and the failure to distinguish unrealized capital gains and realized ones.”

In fact, it is BOTH. Profit theory, as it is taught since 200+ years, fails to axiomatically distinguish between (i) monetary profit and distributed profit and (ii) monetary and nonmonetary profit. Issue (ii) has been dealt with elsewhere.* Your wow-yippee argument proves that you are ill-informed.

Capital is NOT in the axiom set of the pure production-consumption economy which explicitly defines the MINIMUM set. Capital has to be DERIVED from the minimum set and comes logically in a later step. Capital has been dealt with elsewhere.* You are simply ill-informed.

You say: “Oh, and make that second axiom be about output equals per capital output times population. That is even more general, and thus more scientific than your second axiom.”

The relationship between total labor input L and population is given with this formula. The differentiated individual labor time Li is formally split into the norm time U, e.g. 8 hours per day times working days per period, and an individual factor l1, l2 … li … ln, such that Li=Uli. A value of li=0 means that the person is not in the labor force, li=1 means that the i-th worker works full-time, li=0.5 means half-time, and li greater1 means overtime. This gives the relationship between total labor input L in the axioms and total population n. The issue has been dealt with elsewhere.* You are simply ill-informed.

In sum: Nice try to filibuster away the fact that economists do NOT know until this day what profit is and that Econ 101 is axiomatically false and beyond repair.** Filibuster, though, does not help: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse.” (McCauley)

Whatever it is that Peter Dorman (he/him), Sandwichman and you are doing on this blog, it is NOT economics and it is NOT science.

* See blog and working papers
** For details see ‘The father of modern economics and his imbecile kids’ and 'Profit and the collective failure of economists'