September 23, 2017

10 steps to leave cargo cult economics behind for good

Comment on Lars Syll/Pramit Bhattacharya on ‘Seven sins of economics’

Blog-Reference and Blog-Reference and Blog-Reference on Sep 26

Lars Syll gives a heterodox inventory of all that is wrong with economics. This, in turn, initiates the correct sequence for the next steps to be taken.

(i) Taking stock


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.

Provable false:
• profit theory, since 200+ years,#1
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM), since 80+ years.#2

This means (1) that both orthodox and heterodox economics is cargo cult science, and (2), that the textbooks from Samuelson to Mankiw and Rodrik are proto-scientific rubbish.#3


(ii) Paradigm shift


Economics is a failed science. The four main approaches are indefensible. The arguments of the representative economist about specific difficulties of his subject matter have to be taken for what they are: as excuses, more precisely, as thoroughly refuted excuses.#4

The fact that an approach is axiomatically false means that it cannot be improved but must be fully replaced.

(iii) System science


The representative economist maintains that economics is a social science. This is a popular misapprehension. In fact, economics is a system science. Economics is about how the economy works and NOT about Human Nature/motives/behavior/action.#5 These issues are left to psychology, sociology, anthropology, history, Political Science, social philosophy, biology/evolution theory etcetera.

(iv) Separation of Politics and Science


The question about the Good Society is a political question that has to be answered in the political realm and NOT in the scientific realm. Already J. S. Mill was quite explicit about the separation of politics and science.#6

(v) True macrofoundations


Fact is that the subject matter of economics is ill-defined or, in methodological terms, that economics is axiomatically false.

A paradigm shift means in practical term that economics has to move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations because if it isn’t macro-axiomatized, it isn’t economics.#7

(vi) Methodology


The failure of economics is mainly due to the Fallacy of Insufficient Abstraction. In other words, economists cannot rise above the level of storytelling. One storyline is that of supply-demand-equilibrium and the wonderful feats of the Invisible Hand, the other storyline is that of the struggle between the good guys = workers and the bad guys = capitalists. Storytelling is scientific garbage but people like it.

The economy is an abstraction. The correct abstraction to start with is what Keynes called the ‘monetary theory of production’. Scientific theories are defined by material/formal consistency.

The analysis proceeds top down, that is, it starts with macrofoundations which are step by step differentiated, in other words, the analysis advances from the elementary to the complex.

There is no vague blather, no rhetoric, no metaphors, no psychologism, no sociologism, no second-guessing of motives or expectations, no sitcom talk, no narrative and no storytelling. There is nothing but measurable variables, equations and graphs. Because all variables are measurable all conclusions are testable.


(vii) The pure production-consumption economy


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.#8 The pure production-consumption economy is formally given by:
• Three macro axioms:
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
• Two initial conditions: market clearing, i.e. X=O, and budget balancing, i.e. C=Yw
• Two definitions: monetary saving of the household sector Sm≡Yw-C and monetary profit of the business sector Qm≡C-Yw. For the balances holds Qm+Sm=0.

(viii) The evolving economy


The axioms (A1) to (A3) refer to a period of predetermined length. The variables for one period and the next period are connected by rates of change (deterministic or random). The proper formal representation is not a system of equations but a simulation. The open-ended simulation is given with the Economics God Equation.#9


(ix) The market


It is a must to forget a whole bunch of NONENTITIES: utility, production function, supply function resp. SS-curve, demand function resp. DD-curve, equilibrium/disequilibrium. Supply-demand-equilibrium, the totem of micro/macro, is a NONENTITY. The macroeconomic market is formally defined with the Law of Supply and Demand.#10

(x) Employment and real growth/decline


The pure production-consumption economy has, of course, to be expanded to the investment economy. This yields the Employment Law.#11, #12 This equation shows how employment/unemployment depends on aggregate demand and the price- and profit mechanism, i.e. on the relative changes of wage rate, price, and productivity. The growth/decline of output and changes of the income distribution can be derived from the employment equation. The stocks of inventory, money, and capital are consistently derived from the period flows as numerical integrals.

The Employment Law proves that the market economy is inherently unstable and delivers the levers for effective policy measures.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith
#2 Economics: 200+ years of scientific incompetence and fraud
#3 The father of modern economics and his imbecile kids
#4 Failed economics: The losers’ long list of lame excuses
#5 Economics is NOT about Human Nature but the economic system
#6 Economics: the emancipation of science from politics
#7 First Lecture in New Economic Thinking
#8 For the verbal description see ‘How the intelligent non-economist can refute every economist hands down
#9 Wikimedia, The Economics God Equation
#10 Wikimedia, The Four Basic Economic Laws
#11 Wikimedia, Employment Law, Investment economy
#12 See also Wikimedia, Pure production-consumption economy incl. distributed profit and money