January 30, 2015

Looking for suitable alternatives

Comment on 'Marginalising Heterodoxy hampers good teaching in economics'

Blog-Reference

The Association for Heterodox Economics (AHE) writes: “What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant.”

With the latest financial crisis the argument that Orthodoxy is a failure gained wide popularity. It should not be forgotten, though, that most arguments against Orthodoxy are known at least since Veblen. The problem is that Heterodoxy has not come forward in the interim with a promising alternative.

“... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend, 2004, p. 72)

Things have not much improved lately.

The AHE writes: “As Perry Mehrling also states in the podcast, ‘This is a very unusual initiative from my point of view. It seems to be driven, actually, by wanting to make some intellectual change, and not knowing what kind of intellectual change we want to make’.”

Everybody knows that a paradigm shift is needed. But because Heterodoxy has no suitable alternative it cannot take place. Hence the plea for pluralism. The idea of pluralism, though, refers to the social and political sphere. In science things are different. There cannot be a pluralism of false theories. If Orthodoxy is false it has to be replaced.

To develop the scientifically valid replacement of Orthodoxy is the task of constructive Heterodoxy. For the first two contributions to a new curriculum see (2015b; 2015a).

Egmont Kakarot-Handtke


References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Say’s Law. SSRN Working Paper Series, 2556434: 1–10. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL

January 29, 2015

Wanted: The true theory

Comment on 'Economics curriculum reformulation'

Blog-Reference and parallel Blog-Reference

You write: “We should demand more of our economics textbooks.”

Yes, the true economic theory.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Heterodoxy has made abundantly clear that Orthodoxy is a failed approach. As Steve Keen resumed:

“So the textbooks are wrong.” (2011, p. 19)

This is consensus, however, there is a strong feeling that something is missing.

“As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

Heterodoxy has shown what is wrong. Now it is of some interest to learn what is right. Appeals for interdisciplinary work and pluralism are always readily accepted. But running through open doors is not enough.

To develop the scientifically valid replacement of Orthodoxy is the task of Constructive Heterodoxy. Two pivotal contributions to the new curriculum are ready for adoption (2015b; 2015a).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Say’s Law. SSRN Working Paper Series, 2556434: 1–10. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
Keen, S. (2011). Debunking Economics. London, New York, NY: Zed Books, rev. edition.
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical
Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY, Melbourne: Cambridge University Press.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.


See also the synopsis 'Textbooks: Learning without understanding' on this webpage.

January 28, 2015

Naive arithmetic

Comment on Lars Syll on 'NAIRU — more religion than science'

Blog-Reference

You summarize: “It [NAIRU] has fallen out of favor partly because its conceptual foundation is weak and partly because its empirical track record does not inspire confidence.”

The conceptual foundation is not weak but false.

The original Phillips curve was about the relation of the rate of unemployment and the rate of change of the wage rate (Phillips, 1958). Phillips studied more than a century's worth of data and established the stable inverse relation for the United Kingdom. Phillips's original curve was a remarkable empirical finding. It has to be emphasized that Phillips ‘had not made an explicit link between inflation and unemployment’ (Ormerod, 1994, p. 120).

The original curve was transformed by Samuelson with the simple formula: rate of inflation = rate of wage growth - rate of productivity growth (Samuelson and Nordhaus, 1998, p. 590). This formula, according to Samuelson an ‘important piece of inflation arithmetic’, says that price inflation runs in tandem with wage inflation and that both have basically the same effect on employment respectively the rate of unemployment. The difference between the original and the bastard Phillips curve consists of a 1 percent productivity growth. This naive arithmetical exercise led to the far-reaching policy conclusion that there exists an exploitable trade-off between inflation and unemployment.

Needless to say that this basic version experienced refinement, reinterpretation, and qualification in the sequel. It was completely overlooked in the ensuing filibuster, though, that, to begin with, the underlying arithmetic was fallacious. The lack of a sound theoretical foundation did not prevent the application of the Samuelson-Solow Phillips curve. Quite the contrary. Phillips is said to have remarked ‘if I had known what they would do with the graph I would never have drawn it.’ (Quiggin, 2010, p. 91).

You summarize: “Despite the extensive press coverage the NAIRU concept has received recently, the theory of the inflation unemployment relationship that it is part of is quite controversial.”

The correct inflation unemployment relationship is given in the most elementary form by this equation.

Roughly speaking, this structural Phillips curve says: if price inflation is ‘stronger’ than wage inflation unemployment increases; if price inflation is ‘weaker’ than wage inflation unemployment decreases; if both are of ‘equal strength’ then the structural Phillips curve is vertical at the actual unemployment rate. For the details see (2012).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous
Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Ormerod, P. (1994). The Death of Economics. London: Faber and Faber.
Phillips, A. W. (1958). The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957. Economica, 25: 283–299. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.
Samuelson, P. A., and Nordhaus, W. D. (1998). Economics. Boston, MA, Burr Ridge, IL, etc.: Irwin, McGraw-Hill, 16th edition.

Essentials of Constructive Heterodoxy: Say's Law

Working paper at SSRN

Abstract The core problem of economics is that the representative economist never managed to keep political and theoretical economics properly apart. The mixture is toxic indeed. As Joan Robinson said about what parades as economics: Scrap the lot and start again. Yet, the question then arises where to start. To solve the Starting Problem  first formulated by J. S. Mill  is the all-dominant initial step of a paradigm shift. The most urgent task of a constructive Heterodoxy is to rethink pivotal concepts like market, Say's Law, profit, etcetera. The reconstruction of the theoretical superstructure from scratch is an absolute methodological necessity.

January 27, 2015

No religion, merely incompetence

Comment on 'NAIRU — more religion than science'

Blog-Reference

The discussion about NAIRU has always been vacuous because employment is given by this testable formula.

For the scientifically valid derivation see (2014) or (2012).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous
Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

January 26, 2015

Substandard thinkers

Comment on 'Who is bullshiting who here?'

Blog-Reference

Lars Syll writes: “Sorry, but what Krugman and Mankiw do is economics. They’re leading economists, and if you don’t like what they do, fine, but that just means there’s some aspect of economics that you don’t like. It’s silly to restrict “economics” to just the stuff you like.”

First of all one has to distinguish between theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. In political economics anything goes; in theoretical economics scientific standards are observed.

The core problem of economics is that the representative economist never could get out of the intellectual morass of political economics. This is why economics is a failed science.

To say that what Krugman and Mankiw do is economics is at once true and false. It is like saying Ptolemy did astronomy. In a way he did but only until it was found out that his epicycles were just figments of the imagination.

Krugman never realized that IS-LM is a figment of the imagination and - worse - that it is logically defective (2014). He obviously lacks scientific acumen. The problem is not that Krugman's economics is politically unpopular in some quarters, the problem is that it is cargo cult science.

It is a minor irritation that Krugman or Mankiw are “parading as economics.” The real embarrassment  is that political economics is parading as science.

It is silly to restrict economics to what economists think is economics. Economists are in the state of manifest self-delusion (2013). As Joan Robinson said about the stuff that parades as economics: Scrap the lot and start again.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
2207598: 1–16. URL
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of
Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL

January 23, 2015

The prophets of wish-wash, ignoramus et ignorabimus, and preemptive vanitization

Comment on Lars Syll on 'On abstraction and idealization in economics'

Blog-Reference

Paul Davidson has already given the resume “To throw up one’s hand and say we can not know what will happen  is to surrender to fools!”

Of, course, science does not explain everything. Of course, there are different modes of explanation. Of course, they are legitimate. Why? Because we are in a trial-and-error process. That means, we have a distinct feeling that known answers are unsatisfactory or false. And we have a distinct feeling that there must be better answers. This, in a nutshell, is the scientific stance.

Not all people share this stance. They need not! The curious thing is: Why do these people climb on a soap box and do not get tired of telling everyone that the real world is fuzzy, vague, indeterminate, complex, that there is no absolute knowledge, that there are undecidable questions, that something cannot be done, that something other cannot be known in principle, that nobody can predict the path of a flying feather, and  finally — that they have no clue either.

I leave it to anybody’s guess why these people climb on a soap box. Suffice it to say that they contribute nothing to science because science is concerned with questions that  with a positive probability  do have a definite answer that satisfies the criteria of material and formal consistency. The rest is for the birds.

The crucial point is: Science does not explain everything, but non-science explains nothing.

Trivially true, we cannot know everything, but from this does not follow that we cannot know something. It is this Something that science is all about, and it this Something that theoretical economics is all about.

In economics, we face a specific problem: there is theoretical and political economics. The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. From the viewpoint of science political economics as a whole is a no-go. The first problem of economics is that many economists are not scientists but agenda pushers of one sort or another.

Because of this, the argument of complexity, inconclusiveness, incompleteness or futility means something different in economics than Socrates's 'I know that I know nothing' or Newton's 'playing on the sea-shore ... whilst the great ocean of truth lay all undiscovered before me'.

It is worth to recall that Hayek has recruited Socrates for his own agenda with the well-known argument that because the market system is so complex and we cannot know much about it all government action is futile and therefore all should be left to the invisible hand of the market. And it is quite consequent indeed that Hayek dismissed science as scientism. He simply let the key vanish from sight. If you know nothing, you cannot do anything.

All this is perfectly legitimate in the context of political economics. What has to be emphasized, though, is that political economics is scientifically worthless.

And at this juncture, things become a bit absurd. A heterodox economist simply cannot say all is so complex and we cannot be sure of anything and that empirical tests are inconclusive and that the axiomatic-deductive method is inapplicable in economics. Because in this case, all he has to say is: I do not like orthodox economics. This may be politically relevant but it is of no scientific consequence.

From the fact that abstraction, idealization, or the axiomatic-deductive method have been misapplied by Orthodoxy follows only that the representative economist is scientifically incompetent. It does not follow that abstraction, idealization, or the axiomatic-deductive method cannot or should not be applied by heterodox economists.

Just the contrary, or, in Paul Davidson's words: not to apply them is to surrender to fools.

Egmont Kakarot-Handtke

January 20, 2015

Beauty or horseshit?

Comment on 'On abstraction and idealization in economics'

Blog-Reference and parallel Blog-Reference

Lars Syll writes: “When applying deductivist thinking to economics, neoclassical economists usually set up “as if” models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is of course that if the axiomatic premises are true, the conclusions necessarily follow.” (see intro)

We all can agree on this. What is a bit irritating is the fact that on the LPS blog not long ago a discussion was initiated under the title 'Axiomatic economics  total horseshit'. See here.

This thread in turn was the reaction to two preceding discussions on the RWER blog. The first thread bore the title 'Proper use of math in economics' and repeated Marshall's famous phrase 'Burn the mathematics'. See here.

The second thread bore the title “The failure of economics is due to the use of axiomatic method”. See here.

An even earlier discussions of this important methodological issue has taken place on the LPS blog under the title 'Debreu and the Bourbaki delusion of deductive-axiomatic economics'. See here.

While the tone in this contributions varies from the emotional to the rational the message consists invariably in the same logical shortcut: neoclassical economics is crap, the neoclassical approach is built upon axioms, therefore, the axiomatic-deductive method is inapplicable in economics.

Where do we agree? Yes, the neoclassical approach is unacceptable for compelling methodological reasons. What Hans Albert has said in 1963 about 'attempts to immunize economic statements and sets of statements (models) from experience through the application of conventionalist strategies' was right then and is right now.

Since its very beginning, neoclassical theory violates the scientific criteria of material and formal consistency. However, this is not easy to see, because the fault is not to be found in the superstructure. Keynes knew this.
“For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises.” (1973, p. xxi)

And Hutchison knew this.
“For it can fairly be insisted that no advance in the elegance and comprehensiveness of the theoretical superstructure can make up for the vague and uncritical formulation of the basic concepts and postulates, and sooner or later ... attention will have to return to the foundations.” (1960, p. 5)

And Hutchison drew the correct conclusion: “attention will have to return to the foundations.” That means, the neoclassical axioms have to be replaced. This is, in methodological terms, what a paradigm shift is all about.

Lars Syll's proposal to ignore or even to abolish the axiomatic-deductive method is counterproductive. Unfortunately, the methodological essentials of theory construction were never well understood by Heterodoxy (2012). It is a fact, that not only Orthodoxy is in a state of manifest confusion but Heterodoxy too.

This, indeed, is the correct way to proceed:
“We should also like to underline Debreu’s effective reference to Bacon when he says that “citius emergit veritas ex errore quam ex confusione.” It would be a mistake to lower the level of analysis and clarification. The only way possible is a thorough reexamination of the theory’s basic hypotheses, i.e., a true paradigmatic revolution.” (Ingrao and Israel, 1990, p. 362)

With regard to neoclassical axiomatization the great heterodox economist Georgescu-Roegen has said all:
“Here, just in the art of painting, we should not blame colors for the horrible works some “painters” may produce with them.” (1979, p. 323)

Egmont Kakarot-Handtke


References
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Kakarot-Handtke, E. (2012). Crisis and Methodology: Some Heterodox Misunderstandings. SSRN Working Paper Series, 2083519: 1–22. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.

January 19, 2015

Income, profit, distributed profit: a radical simplification

Comment on 'The first of the great powers to reduce private debt will be the world's next hegemon'

Blog-Reference

OK, let us take your numbers. Imagine one giant firm, Art Inc, which is identical with the business sector as a whole.

In the first period you pay a total wage income Yw of 100 and receive 180 which is identical to total consumption expenditures C of the household sector. Note that the households sector's budget is not balanced (C>Yw). Art Inc posts a monetary profit Qm=80 at the end of the first period. This profit is equal to the dissaving (Sm=Yw-C) of the household sector, that is, Qm=-Sm.

Imagine further that the banking system consists only of the central bank. Then both sides of the central bank's balance sheet increase by the same amount. The household sector's overdrafts at the end of period 1 are equal to the business sector's current deposits, i.e. 80 (2011, Sec. 2).

In the second period there is wage income and distributed profit, i.e. total income Y consists of wage income Yw=100 and distributed profit Yd=30, so Y = 130. Now all depends on whether distributed profit is spent on consumption goods or saved. Let us keep consumption expenditures unchanged, i.e. C=180. At the end of period 2 profit is again Qm=80, i.e. 180-100. Because of profit distribution Yd=30, retained profit Qre is 50=80-30. This amount is equal to the household sector's dissaving Sm=130-180=-50.

The balance sheet of the central bank at the end of period 2 is 80+50=130 i.e. the households sector's debt (= cumulated overdrafts) is equal to business sector's current deposits.

The whole process reverses as soon as the households pay off their debt as they are supposed to do at some future date.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary
Circuit. SSRN Working Paper Series, 1973952: 1–23. URL

Lost and found

Comment on 'Brad DeLong and the true nature of neoclassical economics'

Blog-Reference and parallel Blog-Reference

You write: “But instead of just criticism, how about educating us on who you think is doing the kind of analysis that is useful and what their theories are. It would be more helpful to point in the right direction than just declaring how lost we are.”

With their critique, heterodox economists are one big step ahead of Orthodoxy and it is an enigma, to be solved by the historians of economic thought, how it could happen that a scientific stillbirth like neoclassical theory has been accepted for so long by so many.

On the other hand, the weakness of Heterodoxy has always been this:
“As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction.” (Nell, 1980, p. 1)

The methodological essentials of theory construction were never well understood by Heterodoxy (2012). Because of this, it cannot be expected from some heterodox manifesto 'to point in the right direction.' Heterodoxy, too, is lost in the wood.

Vis-à-vis the endemic green cheese assumptionism of the neoclassical approach the common sense of Heterodoxy often appears as progress. Keynes is a case in point. However, common sense is simply not enough for a paradigm shift. Debunking, too, is necessary but insufficient.

“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, 1992, p. 161)

It is the task of Constructive Heterodoxy to work out the replacement for the failed neoclassical approach (e.g. 2015; 2014).

Economists have but one choice: to break new ground or to defend the scientifically indefensible – like Brad DeLong and others of the lost generation.

Egmont Kakarot-Handtke


References
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Kakarot-Handtke, E. (2012). Crisis and Methodology: Some Heterodox Misunderstandings.
SSRN Working Paper Series, 2083519: 1–22. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market.
SSRN Working Paper Series, 2547098: 1–10. URL
Nell, E. J. (1980). Growth, Profits, and Property, chapter Cracks in the Neoclassical
Mirror: On the Break-Up of a Vision, pages 1–16. Cambridge, New York, NY,
Melbourne: Cambridge University Press.

January 18, 2015

Refocusing the debt/profit issue

Comment on 'The first of the great powers to reduce private debt will be the world's next hegemon'

Blog-Reference

The two Figures in Debunking Squared (2013) have been characterized in the text as 'straightforward graphical demonstration'. Whether you call the four-quadrant representation of the pure consumption economy a model or a graph is of no great importance.

It is a bit unfortunate that you obviously cannot interpret the Figures. However, if you prefer a strictly formal argument you could turn to the working papers that have been listed in the References. You find the elementary equations that underlie the graphical representation also here and there (2015, p. 2) and here.

You say you like the summary: 'Total income is the sum of wage income and distributed profit and not of wage income and profit.' However, that is not a matter of personal taste but of the correct formal representation of the pure consumption economy. If you do not get this most elementary case right you are lost.

The key argument is that because total income is not (i) the sum of wages and profits but of (ii) wages and distributed profit all approaches that are based on (i) are untenable and this includes Keen's approach (and Keynes's, and Kaldor's, and Kalecki's, and Minsky's, and so on).

The fact of the matter is that both orthodox and heterodox economists cannot tell the difference between the fundamental economic magnitudes income and profit. This means that they are out of science.

From the formally correct approach follows for the pure consumption economy: As soon as private/public households pay off their debts the economy breaks down. It does not matter whether the debt consists of overdrafts, mortgages, bonds or any other of the myriad forms. The consistent inclusion of the banking sector is an entirely separate issue (2011a; 2011b).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011a). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–26. URL
Kakarot-Handtke, E. (2011b). Reconstructing the Quantity Theory (II). SSRN Working Paper Series, 1903663: 1–19. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL

January 15, 2015

Growing debt is bad, but shrinking debt is worse

Comment on 'The first of the great powers to reduce private debt will be the world's next hegemon'

Blog-Reference

Your blog is about the perils of debt. On the face of it, you are right: there are problems and they are as old as economics.

“Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by political economy  a branch of the science of the statesman or legislator, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt trough the conquest of her colonial Empire.” (Halévy, 1960, pp. 104-105)

The core problem with debt is that economists do not understand the relationship between household sector deficit and business sector profit. In other words, the profit theory is false since Adam Smith.

In a short working paper titled Debunking squared (2013) I have demonstrated this for Steve Keen's profit theory. What holds for Keen holds for the rest of Heterodoxy  and, of course, for the New Arthurian.

First important point: both Orthodoxy and Heterodoxy lack the true theory. That is bad in several respects.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

The true theory says that  in the simplest of all possible cases  profit/loss is exactly equal to dissaving/saving or in other words to growing/shrinking household sector debt. For the formally correct derivation of this fundamental relationship (in fact, the live formula of the market economy) see (2014). The relationship becomes a bit more complex when profit distribution, investment, government, and foreign trade are included.

Condensed to a slogan, the true theory says for the world economy as a whole: a growing debt of private households and/or government is the essential condition for the stability of the market economy.

In other words, the true theory predicts (for a closed economy): As soon as private/public households pay off their debt the economy breaks down.

Egmont Kakarot-Handtke


References
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon Press.
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

January 14, 2015

More error than trial

Comment on '”New Keynesian” haiku economics'

Blog-Reference

Science is a trial-and-error process and that means that the quantitatively greater part of what scientists produce eventually turns out to be waste. This is no problem at all – provided there is a method of, so to speak, separating gold from gravel.

In science we have two criteria: formal and material consistency. Theories that are logically defective or are refuted by facts end on the waste heap. The separation process does not work, of course, with an immediate 100 percent efficiency. So, at any point of time there are some false theories held and defended in the public domain by honest scientists. However, by sticking to the scientific method we develop in the course of time what Popper called verisimilitude, i.e., an approximation to the truth.

What we can observe is, indeed, that this process does not seem to work properly in economics. What we see is the refinement of an approach that has been wrong-footed from the very beginning. Everyone who looks closely into the matter cannot fail to recognize that the heterodox critique of Orthodoxy is to the point.

The curious thing, however, is that there seems to be a lack of serious attempts to overcome the Jevons-Walras-Menger paradigm.

“Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

The best-known exception was, of course, Keynes. The problem with Keynes is that he often had the right intuition but could not translate his ideas into the form of a logically consistent theory. Yet, this is the very task of the economist.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

While Keynes did not succeed with the intended paradigm shift it is certainly the case that with his educated common sense he was closer to the real world than the 'crazy models' of contemporary New Classicals or New Keynesians.

When one advances in Keynes's innovative spirit and avoids his conceptual and logical errors/mistakes then one can derive a macroeconomic employment equation (2014, eq. (22)) which is reproduced here.

From this equation follows a confirmation of Keynes's intuitive arguments:
“So, what Keynes actually did argue in General Theory, was that the classical proposition that lowering wages would lower unemployment and ultimately take economies out of depressions, was ill-founded and basically wrong.”
“During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.” (see intro)

The final conclusion appears a bit paradox: The formal part of the General Theory is defective, however, Keynes's assertions with regard to the interrelation of wage rate and employment are correct. The sticky-wages argument of New Keynesianism on the other hand is far beside the point (not to speak of its theoretical poverty).

There has been no real scientific progress in economics since Keynes.

Egmont Kakarot-Handtke


References
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge:
Cambridge University Press.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
Method in Economics and Econometrics. Cambridge, MA: MIT Press.

January 13, 2015

Keeping the focus on the basic issue

Comment on modern-cikande on  'Saving Equals Investment?'

Blog-Reference

You are right to point out that the relationship between saving and investment gets a bit more complex as soon as government and foreign trade is included. I propose, however, to proceed according to this tried and tested methodological rule:

“There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, 'more realistic' assumptions are being made.” (Morgenstern, 1941, p. 373)

So, let us take at first the special case M=X and G=T in your expanded formula then we are back to I=S. Now, in my comment of Nov 30 above I have given the proof that this formula is logically indefensible (see alternative link below). The deeper analysis shows that — in the most elementary case — the correct result is not saving equals investment but saving equals loss.

Clearly, when in the most elementary case saving is not equal to investment then your expanded formula does not hold either. So there is no need to consider it further.

The logical mistake in Wren-Lewis's formal argument is the following:
He says: “In the most simple model of a closed economy without government, income (Y) = consumption (C) + saving (S), but also expenditure (Y) = consumption (C) + investment (I). So S=I by definition. But here investment includes what is called ‘stockbuilding’ or ‘inventory accumulation’, which includes goods that firms wanted to sell but could not.”

Note first that Wren-Lewis pulls inventory accumulation out of the empty hat. Change of inventory presupposes a difference of quantity produced O and quantity bought/sold X, that is O-X>0 or O-X<0. These real magnitudes do not appear in Wren-Lewis's formalism at all. And from the nominal magnitudes that do appear does not follow that the market is not cleared.

The statement 'investment includes what is called ‘stockbuilding’ or ‘inventory accumulation’' neither has a logical nor a real justification.

Note also that the real variables O and X appear in my formalism. Therefore, my formalism is complete while Wren-Lewis's formalism is incomplete. That is, his argument is unfounded.

From household sector saving does not follow that the market is not cleared and that there is an unsold quantity. Under the condition of market clearing O=X follows that the market clearing price falls and that the business sector makes a loss which is exactly equal to saving, i.e. -Qm=S.

Therefore, all I=S-models are false. This applies, of course, also to Keynes's General Theory (1973, p. 63) and to IS-LM (2014).

The deeper reason is that neither Keynes nor Wren-Lewis nor the representative economist can tell the difference between profit/loss and income. And this is why economics is a failed science.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of
Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
Macmillan. (1936).
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political
Economy, 49(3): 361–393. URL


Alternative link, i.e., full version, no space restriction
For cross-references see here.

January 12, 2015

Of birds and worms

Comment on Lars Syll on '”New Keynesianism” — neat, plausible and wrong'

Blog-Reference

Lars Syll writes: “Maintaining that economics is a science in the “true knowledge” business, yours truly remains a skeptic of the “New Keynesian” pretences and aspirations of people like Paul Krugman, Simon Wren-Lewis and Greg Mankiw.”

Attention! Science is in the true knowledge business. New Keynesianism is not in the true knowledge business. Therefore, New Keynesianism is out of science. This is not a matter of skepticism but of fact. It is important to avoid the following logical shortcut: New Keynesianism is a failed scientific look-alike, and this proves that scientific methods are inapplicable in economics. This, indeed, is a wrong conclusion that is widespread among heterodox economists.

Lars Syll writes: “Keynes basically argued that it was inadmissible to project history on the future.”

True, but is this a great revelation? It is common knowledge among physicists.

“The future is unpredictable.” (Feynman, 1992, p. 147)

And the great heterodox economist Georgescu-Roegen put it quite nicely: “The upshot is that we cannot possibly have a bird's eye view of the future evolution of mankind. All we can have is a worm's eye view, that is, we can at most have some idea of what is likely to happen in the very near future.” (Georgescu-Roegen, 1979, p. 325)

What seems new to economists has been practiced by scientists in all ages.

“The bifurcation of motion into two fundamentally different types, one for natural motions of non-living objects and another for acts of human volition ... is obviously related to the issue of free will, and demonstrates the strong tendency of scientists in all ages to exempt human behavior from the natural laws of physics, and to regard motions resulting from human actions as original, in the sense that they need not be attributed to other motions.” (Brown, 2011, p. 211)

Because human action is original humans have to be treated in the first approximation as randomizers in the economic system. Obviously, economists got something badly wrong.

“Much of economic theory is based on three questionable assumptions: (1) the world is deterministic; (2) decision makers act as if they know the values of all relevant parameters; and (3) consumers and firms respectively, act as if they were maximizing utility and profit.” (Stigum, 1991, p. 29)

The fatal mistake of Orthodoxy is the attempt to build economic theory upon a behavioral assumption. The locus classicus is Jevons. He combined the subjective concept of constrained optimization ...

“Repeated reflection and inquiry have led me to the somewhat novel opinion, that value depends entirely on utility.” (1911, p. 1)

... with mechanical determinism and axiomatization.

“Its method [the mechanics of utility and self-interest] is as sure and demonstrative as that of kinematics or statics, nay, almost as self-evident as are the elements of Euclid, when the real meaning of the formulæ is fully seized.” (1911, p. 21)

Quite obviously, Jevons copied the Newtonian method without true understanding. All looked pretty much like real science but it was only a big misunderstanding.

“Did anyone ever attempt to found a system of social science or economics on the level of identity with Newtonian rational mechanics or the Newtonian system of the world? In my research I have never found such an example.” (Cohen, 1994, p. 61)

The simple reason is that there is no such thing as a mechanics of utility. Microeconomics has no sound foundation. Therefore, it cannot be the foundation of anything.

Lars Syll writes: “Where “New Keynesian” economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social systems – including the economic system. The interaction between animal spirits, trust, confidence, institutions etc., cannot be deduced or reduced to a question answerable on the individual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms.”

True, and that means that the behavioral axioms of Orthodoxy have to be replaced by objective structural axioms that describe the fundamental systemic interrelations (which are deterministic and testable). This is what a paradigm shift is all about.

Lars Syll concludes citing Quiggin: “If there is one thing that distinguished Keynes’ economic analysis from that of his predecessors, it was his rejection of the idea of a unique full employment equilibrium to which a market economy will automatically return when it experiences a shock.”

True, but Keynes got the employment theory wrong (2014a; 2014b). The correct employment equation is here.

There is no point in criticizing New Keynesianism. As Joan Robinson once said on a similar occasion: Scrap the lot and start again!

Egmont Kakarot-Handtke


References
Brown, K. (2011). Reflections on Relativity. Raleigh, NC: Lulu.com.
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, pages 55–90. Cambridge: Cambridge University Press.
Feynman, R. P. (1992). The Character of Physical Law. London: Penguin.
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL
Jevons, W. S. (1911). The Theory of Political Economy. London, Bombay, etc.: Macmillan, 4th edition. URL
Kakarot-Handtke, E. (2014a). Towards Full Employment Through Applied Algebra and Counter-Intuitive Behavior. SSRN Working Paper Series, 2456184: 1–25. URL
Kakarot-Handtke, E. (2014b). The Truly General Theory of Employment: How Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

January 11, 2015

Economists for all seasons or just confused confusers?

Comment on 'Krugman & Wren-Lewis flim-flamming on heterodox assaults on mainstream economics'

Blog-Reference

Keynes is so eminently quotable because, as a genuine political economist, he said many plausible things and also the opposite.

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

Clearly, with his famous programmatic statement in the General Theory he demanded a wholesale paradigm shift.

“Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (1973, p. 16)

There is no need, though, to play Krugman and Wren-Lewis off against Keynes or vice versa because all three are wrong.

This is the corpus delicti from the General Theory:
“Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, 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 and Bezemer, 2010, pp. 12-13, 16)

With the Profit Puzzle solved the correct relationship between monetary profit Qm, distributed profit Yd, monetary saving Sm and business sector investment I is given here.

Therefore, all I=S models are definitively false (see also Allais, 1993, p. 69 and give up all hope to filibuster away this logical fact with ex ante/ex post or inventory investment). And this includes IS-LM, a model that has been widely applied in the golden times when all were Keynesians and which is seriously discussed again by Krugman in our days.

Krugman repeated Keynes's mistake on his blog (2014) and Wren-Lewis on his with the post's subtitle “This post is for first year undergraduate students (and the occasional blogger) who appear confused.” See here.

In the final analysis, I=S is a mistake that unites Keynes, Krugman, Wren-Lewis, and some others. Therefore, in the discussion about austerity the underlying theories of all parties are defective —no flim-flam here only the usual scientific incompetence of economists.

Egmont Kakarot-Handtke


References
Allais, M. (1993). Les Fondements Comptable de la Macro-Économie. Paris: Presses Universitaires de France, 2nd edition.
Kakarot-Handtke, E. (2014). Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It. SSRN Working Paper Series, 2392856: 1–19. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan. (1936).
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL
Valentino, R. (1988). Discussion. In H. Hanusch (Ed.), Evolutionary Economics. Applications of Schumpeter’s Ideas, pages 238–249. Cambridge, New York, NY, etc.: Cambridge University Press.

January 9, 2015

Groundhog Day (economics)

Comment on 'Extraordinarily absurd things called ‘Keynesian’' 

Blog-Reference

Lars Syll writes: “All the neoclassical professors were there. Their theories were totally mangled and no one -- absolutely no one -- had anything to say even remotely reminiscent of a defense.”

A field day for Heterodoxy. One of many.

In 1898 the great heterodox economist Thorstein Veblen asked: “Why is Economics Not an Evolutionary Science?” What he pointed out was that the equilibrium models of his neoclassical fellow economists were mistaken, useless, and misleading.

He famously ridiculed homo oeconomicus: “The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact.”

Well said. Yes, Orthodoxy is a failure. Yes, the emperor has no clothes. Yes, the textbooks are wrong. Yes, equilibrium is a nonentity and rational expectations are a green cheese assumption. Yes, the economy is non-ergodic. Yes, Keynes has been distorted beyond recognition. Yes, economics is the finest salmagundi of all times.

We know all this. It does not help. More than 100 years after Veblen homo economicus is still with us. How to get out of the time loop?

“... if we wish to place economic science upon a solid basis, we must make it completely independent of psychological assumptions and philosophical hypotheses.” (Slutzky, quoted in Mirowski, 1995, p. 362)

Time for Heterodoxy to switch from deconstruction to construction (2015).

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.

Essentials of Constructive Heterodoxy: the market

Working paper on SSRN

Abstract The consensus is that orthodox economics is a failure in three dimensions: conceptual, methodological, and empirical. Heterodoxy has meticulously sorted out the multitude of errors, mistakes, and distortions. Yet, this alone does not help out of stagnation. Economists have now to go into constructive mode. The most urgent task is to replace the misleading supply-demand-equilibrium representation of the market. The reconstruction of the centerpiece of the market system from scratch paves the way to the new paradigm. Nobody can talk about the market system without a correct idea of how the market works. Heterodox economists must take the innovative lead.


January 5, 2015

The Profit Law

Comment on Lars Syll on 'Ditch marginal productivity theory once and for all'

Blog-Reference

The economy is a complex system. Because it is impossible to directly observe the actual economy in its totality, the first task is to create a simplified mental representation. As a matter of fact, what is needed for good methodological reasons is the simplest possible description of the monetary economy. This description cannot be other than highly abstract and all depends on whether the abstraction succeeds. This is what J. S. Mill called the opus magnum (2006, p. 746).

The most elementary economic configuration is the pure consumption economy. It is defined by:
(i) Yw=WL wage income Yw is equal to wage rate W times working hours L, (ii) O=RL output O is equal to productivity R times working hours L, (iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

For the graphical representation see here.

At any given level of employment L, the wage income that is generated in the consolidated business sector follows by multiplication with the wage rate. On the real side, output follows by multiplication with the productivity. Finally, the price follows as the dependent variable under the conditions of budget balancing, i.e. C=Yw and market clearing, i.e. X=O. Note that the ray in the southeastern quadrant is not a linear production function; the ray tracks any underlying production function. Note also that it is methodologically inadmissible to take the assumption of decreasing returns into the premises. Note finally that W is the average wage rate if the individual wage rates are different among the employees, which is normally the case.

If the wage rate W is lowered, the market clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price rises. If productivity increases the price falls. In any case, labor gets the whole product, the real wage is invariably equal to the productivity, and profit for the business sector as a whole is zero. All changes in the system are reflected by the market clearing price.

We know, of course, that the firm sets a price that is different from the market clearing price. This case has to be treated separately (2014a).

In the next period, the households save. The result is shown here.

Consumption expenditure C falls below Yw and with it the market clearing price P. With perfect price flexibility there are no unsold quantities and no change of inventory. The product market is always cleared and there is no such thing as an inventory investment. So we have household sector saving but no business sector investment, that is, monetary saving which is given by Sm=Yw-C is not equal to investment I=0.

The crucial conclusion is that the business sector makes a monetary loss which is exactly equal to the household sector's saving, i.e. -Qm=S. Therefore, loss is the exact counterpart of saving; by consequence, profit is the exact counterpart of dissaving. This is the elementary form of the Profit Law. It follows from the profit definition Qm=C-Ym. Note well that profit for the economy as a whole has nothing at all to do with productivity and certainly not with marginal productivity.

And this is why all stories that economists tell about the functioning of the market system and the price mechanism are false (2014b).

In the next step we have to make the economy again a bit more complex. Then we get the general relationship between monetary profit Qm, distributed profit Yd, investment I and saving S as shown here.

In the next but one step government and foreign trade have to be included. Each step brings the Profit Law closer to the complexity of the real world. Best of all: the Profit Law is testable with the accuracy of two decimal places.

There can be no reasonable doubt about the test's outcome: the marginal productivity theory of distribution is refuted once and for all. Economics can become a real science.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications
to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart
Mill. Indianapolis, IN: Liberty Fund. URL

Stop the Zombie wars

Comment on 'Economic realism'

Blog-Reference

You write: “There is only one interesting question in economics: how do we make it stop?”

Yes.

There is, though, not such a simple thing as economics. There is political and theoretical economics. The main differences are:
• The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works.
• In political economics anything goes; in theoretical economics scientific standards are observed.

The answer to your question depends on whether you are a scientific or a political heterodox economist.

The scientific option is to work on the paradigm shift from orthodox economics to heterodox economics. That is, to make a science out of moral philosophy in sheep’s clothing and this in turn means to switch the discussion from good/bad to true/false.

This includes to stop the Zombie wars of green cheese assumptionism (Quiggin, 2010) and debunking.

Egmont Kakarot-Handtke


References
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, NJ, Oxford: Princeton University Press.

January 3, 2015

From obscurity to enlightenment

Comment on 'Axiomatic economics - total horseshit'

Blog-Reference

I came across David Glasner's post of 16 July, 2014 'Modern macroeconomics -- obscurantist axiomatization' on this blog.

This post also deserves a comment in the present context. I will ignore the counterproductive resentments (snobbishness, pedantry, etc.) against axiomatization and focus on some pivotal historical facts.

Glasner writes: “Before discussing the situation in economics, I would note that axiomatization did not become a major issue for mathematicians until late in the nineteenth century (though demands -- luckily ignored for the most part -- for logical precision followed immediately upon the invention of the calculus by Newton and Leibniz) and led ultimately to the publication of the great work of Russell and Whitehead, Principia Mathematica whose goal was to show that all of mathematics could be derived from the axioms of pure logic.”

Axiomatization became already a major issue for mathematicians with Euclid around 300 BC. Among heterodox economists it seems that only Georgescu-Roegen understood the significance of this unique event.

“We are therefore justified in saying that with Euclid's Elements the causa materialis of geometry underwent a radical transformation; from a more or less amorphous aggregate of propositions it acquired an anatomic structure. Geometry itself emerged as a living organism with its own physiology and teleology, .... And this true mutation represents not only the most valuable contribution of the Greek civilization to human thought but also a momentous landmark in the evolution of mankind comparable only to the discovery of speech or writing.” (1966, p. 9)

Axiomatization then became a major issue for physicists with Newton.

The Principia start with the famous 'Axioms, or the Laws of motion' and the role of Euclidean geometry for Newtonian physics cannot be overestimated. So impressive were the accomplishments of Newtonian physics that eighteenth-century philosophers, including the founders of political economy, jumped on the bandwagon.

And so it became an issue in the so-called social sciences with Hume.

“Like most of his fellow moral philosophers, Hume thought it was worth a try to make all sciences as rigorous as Newtonian physics ...” (Redman, 1997, p. 111)

Finally, this is how axiomatization became a major issue in economics around 1800:

“To Senior belongs the signal honor of having been the first to make the attempt to state, consciously and explicitly, the postulates that are necessary and sufficient in order to build up … that little analytic apparatus commonly known as economic theory, or to put it differently, to provide for it an axiomatic basis.” (Schumpeter, 1994, p. 575)

So Glasner got it not quite correct:
“The fetish for axiomatization in economics can largely be traced to Gerard Debreu’s great work, The Theory of Value: An Axiomatic Analysis of Economic Equilibrium.”

The traces go even back before Adam Smith. In fact, the first attempts to axiomatize human behavior can be traced back to Hutcheson, Hume's and Smith's celebrated teacher (Redman, 1997, p. 116).

Glasner got it, again, not quite correct with:
“The idea that a good scientific theory must be derived from a formal axiomatic system has little if any foundation in the methodology or history of science.”

Exactly the opposite is true:
“But it was a second and more important quality that struck readers of the Principia. … For readers of that day, it was this deductive, mathematical aspect that was the great achievement.” (Truesdell, quoted in Schmiechen, 2009, p. 213)

The rest of Glaser's argumentation is not much better (for the refutation of the awkward Gödel argument see here).

The conclusion is obvious. Heterodoxy is right, the neoclassical axioms have to be rejected. This, though, does not mean that axiomatization has to be rejected. On the contrary. In order to replace neoclassical economics, Heterodoxy has to replace the neoclassical axioms by heterodox axioms. There is no way around this.

“The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

And each theory is built upon some foundational premises as already J. S. Mill made abundantly clear. As a matter of fact, cutting-edge physicists take their inspiration from an economist.

“... but underneath the complexities [of string theory] is a modern version of John Stuart Mill's desideratum of fundamental physics: a unified description of all fundamental interactions.” (Farmelo, 2009, p. 436)

Heterodoxy does not have one good reason to reject axiomatization yet many to apply it. The best reason is indeed that correct axiomatization ends confusion, of which is plenty among both orthodox and heterodox economists (2013).

The outrageous fact, written in stone for all future methodologists, is that until this day the representative economist cannot tell the difference between income and profit.

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University
Press, 5th edition.
Farmelo, G. (2009). The Strangest Man. The Hidden Life of Paul Dirac, Quantum
Genius. London: Faber and Faber.
Georgescu-Roegen, N. (1966). Analytical Economics, chapter General Conclusions
for the Economist, pages 92–129. Cambridge, MA: Harvard University Press.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
2207598: 1–16. URL
Redman, D. A. (1997). The Rise of Political Economy as Science. Methodology and
the Classical Economists. Cambridge, MA, London: MIT Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited,
volume 1. Norderstedt: Books on Demand, 2nd edition. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
University Press.

January 2, 2015

Total scientific Dadaism

Comment on 'Axiomatic economics - total horseshit'

Blog-Reference

In the intro Lars Syll writes: “Studying mathematics and logics is interesting and fun. It sharpens the mind. In pure mathematics and logics we do not have to worry about external validity. But economics is not pure mathematics or logics. It’s about society. The real world.”

Economists have their philosophical roots in Bentham's utilitarianism. And it seems that they never dare to get out of this shallow intellectual puddle and to swim in deeper waters. Have they never heard what real scientists have said about mathematics and axiomatization? Have Galilei or Newton or Einstein said that mathematics is fun? That a little intellectual gymnastics is good against mental enfeeblement?

Above all: did one of these three better known scientists ignore the problem of external validity?

Exactly the contrary! For all of them, mathematics was the key to reality -- to the very reality that is producing what the myopic utilitarian experiences when he looks in all his nativity out of the window.

“Experience can of course guide us in our choice of serviceable mathematical concepts; it cannot possibly be the source from which they are derived; experience of course remains the sole criterion of the serviceability of a mathematical construction for physics, but the truly creative principle resides in mathematics.” (Einstein, 1934, p. 167)

Lawson's ontology suffers from several misunderstandings (2013).

“The central message of Lawson’s critique of modern economics is that an economy is an “open system” but economists insist on dealing with it as if it were “closed.” (see parallel intro)

This is true for equilibrium economics. And it is true that Orthodoxy is a failure. But now comes the logical blunder:

“Modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality (1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.”

While Orthodoxy indeed applies the deductive-axiomatic method there is no necessary connection between the method and closed systems. Physicists apply mathematics and the deductive-axiomatic method for the description of an universe that certainly displays no equilibrium and no closure in the sense of orthodox economics. What has to be rejected is the notion of equilibrium/closure and not the deductive-axiomatic method.

Because they are fixated on equilibrium economics Tony Lawson and Lars Syll misunderstand the role of the deductive-axiomatic method for scientific research.

Methodological discussions among economists are total scientific Dadaism.

Egmont Kakarot-Handtke


References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science,
1(2): 163–169. URL
Kakarot-Handtke, E. (2013). Crisis and Methodology: Some Heterodox Misunderstandings.
SSRN Working Paper Series, 2083519: 1–25. URL

January 1, 2015

Humbleness does not help, but scientific imagination could

Comment on 'The hubris of economics'

Blog-Reference

The profit theory is false since Adam Smith.

Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income (2014). This is like pre-Newtonian physics before the elementary concepts force and mass were clearly defined and thoroughly understood.

Economists have nothing to offer in the way of a scientifically founded advice and this has nothing to do with hubris but with a lack of genuine scientific competence.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL

Lacking the Midas touch of science

Comment on Lars Syll on 'Real world filters and economic models'

Blog-Reference

The characteristic capability of science — to turn whatever it might touch into knowledge — obviously has eluded economics. Currently, economists do not understand how the economy works. And there is no real difference between Orthodoxy and Heterodoxy despite much discussion about secondary points. The differences between the schools only demonstrate that there are many ways to get it wrong.

J. S. Mill excused economics in the inescapable benchmark comparison with physics as a separate and inexact science. Indeed, when one compares the respective starting points — Newton and Smith — and the actual state of the fields then one is driven to the conclusion that in the course of time economics has fallen behind even further.

Economics has always taken its inspirations from the real sciences. This includes methodology and theory design (Mirowski, 1995). It did not escape economists that the simplicity argument played a great role in physics.

“... in my opinion there is the correct path and, moreover, that it is in our power to find it. Our experience up to date justifies us in feeling sure that in Nature is actualized the ideal of mathematical simplicity.” (Einstein, 1934, p. 167)

As untalented plagiarists economists used this argument and abused it for the justification of their cargo cult science.

This is the correct way of simplification, abstraction, and idealization:
“The Principia begins with an idealized world, a simple mental construct, a “system” of a single mathematical particle and a centrally directed force in a mathematical space. Under these idealized conditions, Newton freely develops the mathematical consequences of the laws of motion that are the axioms of the Principia. At a later stage, after contrasting this ideal world with the world of physics, he will add further conditions to his intellectual construct — for example, by introducing a second body that will interact with the first one and then exploring further mathematical consequences. ... In this way he can approach by stages nearer and nearer to the condition of the world of experiment and observation, introducing bodies of different shapes and composition and finally bodies moving in variant types of resistant mediums rather than in free space.” (Cohen, 1994, p. 77)

Standard economics, too, starts with an idealized world but then it does not move nearer and nearer to the world of experiment and observation but in the opposite direction in order to rationalize an unsuccessful initial idealization. Thus, idealization, which is indispensable, becomes counterproductive. There is only a thin line between fruitful abstraction and barren absurdity. To assume that the moon is a mass point is unrealistic but fruitful, to assume that it is made of green cheese is unrealistic but nothing else. Most assumptions of conventional microeconomics fall into the green cheese category.

While science turns the junk of ignorance into the gold of knowledge, economics merely turns common sense junk into rigorous junk. Newton's most important methodological message was: hypotheses non fingo. Economists have done the opposite with much alacrity but little success.

Now, what is the fundamental error that unites Orthodoxy and Heterodoxy? It is psychologism: “Psychologism is the view that in any explanation (individualist or otherwise) the only exogenous givens other than natural constraints allowed are those representing psychological states of either individuals or groups.” (Boland, 1992, pp. 147-148)

To paraphrase H. L. Mencken: Psychologism is commonsensical, convincing, and wrong.

“The notion that microeconomics is a branch of applied mathematics does economists more credit than several possible alternative explanations for its empirical weakness. ... It isolates the limitations of the theory in a factual supposition about the determinants of human behavior, one that economists share with all of us. But the supposition we all share is false, and so economics rests on a purely contingent, though nevertheless central, mistaken belief ....” (Rosenberg, 1992, p. 247)

As a matter of fact, no way leads from psychologism of any sort to the understanding of how the actual economy works. The solution does not consist in replacing the unrealistic homo economicus by the realistic homo socialis. The solution consists in replacing behavioral axioms by objective structural axioms.

It is as simple as that:
“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.” (Einstein, 1934, p. 165)

There is only one scientific method. And, in its present state, economics is not a separate and inexact science but a failed science.

Egmont Kakarot-Handtke


References
Boland, L. A. (1992). The Principles of Economics. Some Lies my Teacher Told Me. London, New York, NY: Routledge.
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, pages 55–90. Cambridge: Cambridge University Press.
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Rosenberg, A. (1992). Economics - Mathematical Politics or Science of Diminishing Returns? Chicago: University of Chicago Press.

Objection, your Honour! There is objective truth in economics

Comment Lars Syll on 'Understanding capitalism'

Blog-Reference

It is proverbial that the representative economist does not know how the economy works. Many explanations and excuses have been advanced. Putting aside all individual specifics and possible exceptions for the moment, the main reason is this.

Neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor Econophysicists, nor RBCers, nor New Keynesians, nor New Classicals ever came to grips with profit (cf. Desai, 2008). Hence, 'they fail to capture the essence of a capitalist market economy' (Obrinsky, 1981, p. 495).

Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income (2014). And, clearly, if the premises of a theory are muddled the whole thing ends up in intellectual nirvana. Economics still stands where physics stood in the Middle-ages before the concepts of force and mass were properly defined and clearly understood.

“We are not yet out of the wood; in fact, we are not yet in it.” (Schumpeter, 1994, p. 7)

To conclude from the plain fact that the representative economist is a confused confuser (2013) that “There is no objective truth in economics” (see intro) seems rather far-fetched.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume
(Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave
Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
2207598: 1–16. URL
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics,
3(4): 491–502. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford
University Press.

What economists need now: the correct theory

Comment on Paul Davidson

Blog-Reference

In my papers I have quoted you saying:
“..., before accepting the conclusions of any economist’s model as applicable to the real world, the careful student should always examine and be prepared to criticize the applicability of the fundamental postulates of the model; for, in the absence of any mistake in logic, the axioms of the model determine its conclusions.” (Davidson, 2002, p. 41)

Currently, economists do not understand how the economy works. We therefore have good reason to look closely at the axiomatic foundations.

I agree with you that standard economics has been refuted once and for all and that its axioms are unacceptable. Perhaps you do not agree with me that Post Keynesianism has been refuted, too (2011; 2014b).

But certainly you remember that Keynes has called for a paradigm shift:
“Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics.” (Keynes, 1973, p. 16)

Perhaps it is a really good idea to make a fresh attempt with a 'non-Walrasian-Keynesian' set of objective structural axioms (see 2014a).

Egmont Kakarot-Handtke


References
Davidson, P. (2002). Financial Markets, Money and the Real World. Cheltenham,
Northampton, MA: Edward Elgar.
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN
Working Paper Series, 1966438: 1–15. URL
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics:
Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money.
The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke:
Macmillan. (1936).

No idealization, only misunderstanding and misconstrual

Comment on 'The Invisible Hand -- a brilliant idealization proved wrong by reality'

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For Adam Smith the invisible hand never was an idealization.

“Moreover, Adam Smith used the phrase “invisible hand” on three dissimilar occasions in his writings and in each case it was employed, not to exemplify the Panglossian conclusion that markets always convert private “vices” like selfishness into public “virtues” like income and employment for all, but to demonstrate that, in Robert Burns’s words, 'the best-laid schemes o’ mice and men/Gang aft a-gley'”. (Blaug, 2001, p. 153)

Whatever Smith meant, the metaphor simply took a life of its own. So it has to be taken in the new sense.

The invisible hand metaphor reincarnated as General Equilibrium Theory and the attempt was made to rigorously prove it. This is laudable, because the worst feature of economics until today is the endless wish-wash about metaphors and half-baked concepts. However, this attempt did not succeed.

“It is good to have [the technically best study of equilibria], but perhaps the time has now come to see whether it can serve in an analysis of how economies behave. The most intellectually exciting question of our subject remains: is it true that the pursuit of private interest produces not chaos but coherence, and if so, how is it done?” (Hahn, 1984, p. 102)

So, admittedly economists do not understand how the actual economy works. And from this follows that there is still some scientific homework to be done. For the correct account of how the markets work see (2014).

Egmont Kakarot-Handtke


References
Blaug, M. (2001). No History of Ideas, Please, We’re Economists. Journal of
Economic Perspectives, 15(1): 145–164.
Hahn, F. H. (1984). Equilibrium and Macroeconomics. Cambridge, MA: MIT Press.
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper
Series, 2517242: 1–29. URL

Economists do not solve problems, they are the problem

Comment on 'Economists ― not mathematics ― solve economic problems'

Blog-Reference

It is widely known that the representative economist does not understand how the economy works. Many explanations have been advanced. One of them is that economists have serious troubles with mathematics. The trouble, though, is twofold: economists either reject or accept mathematics but always for the wrong reason.

When economics was young, calculus was the new and tremendously successful tool. So economists copied it (Mirowski, 1995) and this is how marginalism became the chief tool of explanation. This was the first methodological mistake.

“The mathematical language used to formulate a theory is usually taken for granted. However, it should be recognized that most of mathematics used in physics was developed to meet the theoretical needs of physics. ... The moral is that the symbolic calculus employed by a scientific theory should be tailored to the theory, not the other way round.” (Wittgenstein, quoted in Schmiechen, 2009, p. 368)

It has been realized by many observers that utility maximization, equilibrium, perfect competition, etcetera was the unacceptable part of economic theory and not the application of mathematics.

“When very sound and proper mathematics is misused and misapplied to fairyland problems without any basis in the real world, that fact that the mathematics itself is impeccable makes the whole obnoxious game just that more offensive.” (Blatt, 1983, p. 173)

To blame mathematics for its abuse in economics is simply wrong-headed.

“Mathematics is not really of much fundamental use in a science unless that science is able to constitute its basic concepts with “exact axioms” and precise numerical results.” (Weintraub, 2002, p. 26)

Ultimately economists got the basic concepts wrong. Conventional economics rests on behavioral assumptions that are formally expressed as axioms (McKenzie, 2008). Axioms are indispensable to build up a theory that epitomizes formal and material consistency. The fatal flaw of the standard approach is that human behavior does not yield to axiomatization.

As a matter of fact, no way leads from psychologism of any sort to the understanding of how the actual economy works. The solution consists in replacing behavioral axioms by objective structural-systemic axioms (2014).

Egmont Kakarot-Handtke


References
Blatt, J. (1983). How Economists Misuse Mathematics. In A. S. Eichner (Ed.), Why Economics is Not Yet a Science, pages 166–186. Armonk, NY: M.E. Sharpe.
Kakarot-Handtke, E. (2014). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
McKenzie, L. W. (2008). General Equilibrium. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–18. Palgrave Macmillan, 2nd edition. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Schmiechen, M. (2009). Newton’s Principia and Related ‘Principles’ Revisited,
volume 1. Norderstedt: Books on Demand, 2nd edition. URL Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, NC, London: Duke University Press.

Economic theory — as false as ever

Comment on Peter Temin, David Vines, Lars Syll on ‘ 'Keynes  more important than ever'

Blog-Reference

You write: “We show how hard it was for Keynes to break away from previous theories that work well for individual people and companies — and even for the economy as a whole in the long run — to define the short run in which we all live.”

You thereby acknowledge that pre-Keynesian economics, i.e. “previous theories”, are valid except in the short run. That is to say, the Keynesian Revolution claims only the short run as its ecological niche and leaves the rest to what Keynes called the 'classicals'.

This is not only false modesty but downright nonsense. Why? Because 'classical' economics always has been invalid and it is still invalid in its recent reincarnations. Why?

Let us take the widest possible perspective. The fact of the matter is that neither Classicals, nor Walrasians, nor Marshallians, nor Marxians, nor Keynesians, nor Institutionialists, nor Monetary Economists, nor Austrians, nor Sraffaians, nor Evolutionists, nor Game theorists, nor EconoPhysicists, nor New Keynesians, nor New Classicals ever came to grips with profit (cf. Desai, 2008, p. 10). Hence, 'they fail to capture the essence of a capitalist market economy' (Obrinsky, 1981, p. 495).

Keynes, to his greatest honor, realized that there was something wrong with previous profit theories: “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 and Bezemer, 2010, pp. 12-13, 16)

Neither orthodox nor heterodox economists understand the two most important phenomena in the economic universe: profit and income (2014b; 2014a). This is like pre-Newtonian physics before the elementary concepts force and mass were clearly defined.

There seems to be complete ignorance among both orthodox and heterodox economists that they have nothing to offer in the way of a scientifically founded advice.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)

Because they lack a correct profit theory neither the proponents of the 'classical' nor of the Keynesian approach have a true theory that could help to fix a crisis or to make the world a better place.

Egmont Kakarot-Handtke


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL
Kakarot-Handtke, E. (2014a). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
Obrinsky, M. (1981). The Profit Prophets. Journal of Post Keynesian Economics, 3(4): 491–502. URL
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered.

The axiomatic method is impeccable

Comment on Lars Syll on 'Debreu and the Bourbaki delusion of deductive-axiomatic economics'

Blog-Reference

Alan Kirman gives an excellent overview about how Debreu et al. led General Equilibrium Theory ad absurdum. I agree with all of it except for the somewhat implicit conclusion that the axiomatic-deductive method is inapplicable in economics, which is expressed in the title. It is logically incorrect to argue from the fact that someone has crashed an airplane into the ground that it is a delusion that airplanes can fly.

A minor point is that Bourbaki cannot be made accountable for the neoclassical structure-without-application: “..., it was the von Neumann perspective that shaped general equilibrium theory ..., and thus reconstituted economic theory.” (Weintraub, 2002, p. 78).

For a suggestive collection of statements about axiomatization see also the AXEC website.

The axiomatic-deductive method is impeccable. It is a sad fact that economists either cannot apply it correctly or do not understand what J. S. Mill, perhaps the greatest methodologist among them (Popper, 1980, p. 19), already clearly understood and taught.

Misapplication of the axiomatic method is ultimately responsible for the failure of Orthodoxy. But worse, lack of understanding is also the most important cause of the failure of Heterodoxy.

A paradigm shift consists in replacing the hitherto existing set of axioms by a better one. Keynes famously demanded to throw over the classical axioms (Keynes, 1973, p. 16). New axioms define a new paradigm. Heterodox economists were hitherto incapable of formulating an alternative set of axioms. It seems that they did not even understand that this is their constructive task. Only for lack of a convincing alternative the obsolete Arrow-Debreu-McKenzie axioms still stand.

To resume with Clower: “My opinion continues to be that axiomatics, like every other tool of science, is no better than its user, and not all users are skilled.” (1995, p. 308)

After the neoclassical misapplication, it is high time that the axiomatic-deductive method is skillfully and successfully put to work in economics (see the AXEC Project).

Egmont Kakarot-Handtke


References
Clower, R. W. (1995). Axiomatics in Economics. Southern Economic Journal, 62(2): 307–319. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Popper, K. R. (1980). The Logic of Scientific Discovery. London, Melbourne, Sydney: Hutchison, 10th edition.
Weintraub, E. R. (2002). How Economics Became a Mathematical Science. Durham, NC, London: Duke University Press.


Related 'Who is afraid of axioms?'