June 30, 2016

Politics, storytelling, and science

Comment on Asad Zaman on ‘ET1% — Economic Theory of the top 1%’

Blog-Reference

What told Marx us about economics?: “In the domain of Political Economy, free scientific enquiry meets not merely the same enemies as in all other domains. The peculiar nature of the material it deals with, summons as foes into the field of battle the most violent, mean and malignant passions of the human breast, the Furies of private interest.” (1906, M.10)

What tells Asad Zaman us?: “Now if we consider conventional economic theory, it is easy to show that nearly all of it is ET1% — it is DESIGNED to prove that policies which favor the top 1% are beneficial for all.”

What tells YouTube us about economics, politics and all the rest? “Everything Is A Rich Man’s Trick.”

And finally, what tells us science? “Apologetics may be a laudable objective. Its practical importance is unquestioned. People need to be shown that the institutions of their own society are good, those of others bad. But there is no place for apologetics in science. Scientific economics inquires only into the How and Why, not into the Good or Bad, of what is. From the scientific point of view preoccupation with Good and Bad is worse than useless since it not only fails to illumine anything but keeps the lightbeam of inquiry from being turned in directions where answers to significant questions can be found.” (Murad, 1953, p. 2)

What is the underlying problem? Every one of us can only have personal experience of a tiny section of space and time and it is not at all certain whether we interpret this personal experience correctly. The rest of reality consists of extrapolation of limited experience, second-guessing of causes and motives, and of what society tells us. Society consists of family, peers, neighbors, teachers, philosophers, priests, gurus, artists, government, business, and the media.

Our view of reality is the result of rather limited personal experience and storytelling. The bad thing is that we are sometimes confronted with facts, events or claims/opinions that do not fit into our world view. And this brings up the distinction between opinion and truth.

“There are always many different opinions and conventions concerning any one problem or subject-matter (such as the gods). This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides ... was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion (hearsay, plausible myth) on the other ...” (Popper, 1994, pp. 39-40)

What the ancient Greeks called opinion/doxa is roughly the same what Buddha called Veil of Maya, what Marx called ideology, what Hollywood calls dream/nightmare, what Bernays called PR/advertising, what Plato called shadows on the cave wall, and what Orwell called big-brother mind-control.

Is Asad Zaman’s claim that ET1% influences opinion true? Yes. Is the claim that they influence science in general and economics in particular true? Yes. Can they determine the outcome of research? No, because nobody knows the outcome in advance. All depends on whether scientists stick to the well-defined rules of science. “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)

Asad Zaman’s claim amounts to the accusation that orthodox economists are fraudsters, that is, that they intentionally produce false theories. This brings us out of science and into the criminal court (see also Lysenkoism on Wikipedia).

Heterodoxy stands before this question: We all agree that Orthodoxy is false so (i) let us forget this scientific garbage and focus on developing the true theory (= materially and formally consistent), or (ii), let us bring Orthodoxy to court and prove that DSGE is not a failed approach but a political fraud. Option (i) is the scientific way to settle matters.

All would be much simpler if Asad Zaman could present the true theory (= materially and formally consistent) of how the actual monetary economy works. In particular, I would like to know which one of the four different heterodox profit theories is correct.*

Egmont Kakarot-Handtke


References
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
Murad, A. (1953). Questions for Profit Theory. American Journal of Economics and Sociology, 13(1): 1–14. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York, NY: Routledge.

* See ‘Heterodoxy, too, is scientific junk’.

Immediately following 'Refocusing economics'.

Why should people trust failed scientists?

Comment on Luigi Zingales on ‘The Real Lesson From Brexit’

Blog-Reference

You say: “In sum, we need to create the conditions to undermine this mistrust of experts. This is the most important lesson from Brexit.”

Economics is about how the monetary economy works. Currently, economics consists of Walrasianism, Keynesianism, Marxianism, Austrianism and these main approaches contradict one another. So they cannot all be true. In fact, they are ALL false. So, economics is a failed science. Economists cannot explain how the monetary economy works. The representative economist cannot even tell what profit is,* so he lacks the key for the understanding of the market economy.

All that society gets from the failed science of economics is folk psychology and folk sociology, second-guessing the central bank and government, confused and scientifically unfounded economic policy advice, and brain-dead propaganda.

Yet, economists communicate each year loud and clear that economics is a science by awarding the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

This is a manifest contradiction that has to be resolved as soon as possible.

Economists lack the true theory. More than 200 years ago, economics started as Political Economy. It tried to become a science but failed. Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLE false and does not deserve any trust at all.

Egmont Kakarot-Handtke

* See on SSRN ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’.

Related 'People have no faith in economics anymore? Do the Sexit now!'

***
REPLY to Ron Waller

You say: “This assumes there was a point in time when economists tried to be scientists. It does not exist.”

Utterly false. There were even several points in time where economics tried to become scientists.

See first J. S. Mill: “In the definition which we have attempted to frame of the science of Political Economy, we have characterized it as essentially an abstract science, and its method as the method à priori. Such is undoubtedly its character as it has been understood and taught by all its most distinguished teachers." (1874, V.46)

And later Jevons’ switch from Political Economy to economics: “Irving Fisher described Jevons’ book A General Mathematical Theory of Political Economy as the start of the mathematical method in economics. It made the case that economics as a science concerned with quantities is necessarily mathematical.” (Wikipedia)

See finally Walras: “To state a theory is one thing; to prove it is another. I know that in economics so-called proofs which are actually nothing more than gratuitous assertions are doled out and find acceptance again and again. And precisely for this reason, I submit that economics will not attain the status of a science until economists are compelled to demonstrate that which they have hitherto been content, in the main, mainly to assert.” (Walras, 2010, p. 427)

Until this day, the key assertion that the existing economic system is self-adjusting has not been proved.* The core of economics, General Equilibrium Theory, is the worst scientific failure since Ptolemy’s Geo-centrism. As Feynman put it: “So we really ought to look into theories that don’t work, and science that isn’t science.” (1974, p. 11)

Luigi Zingales’ call for more trust in economic experts is beyond ridiculous. It is just the other way round, economists have to be expelled from the scientific community because of continous violation of well-defined scientific standards.

References
Feynman, R. P. (1974). Cargo Cult Science. Engineering and Science, 37(7): 10–13. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Walras, L. (2010). Elements of Pure Economics. London, New York, NY: Routledge.

* See ‘Could we, please, all focus on the key question of economics?’.

June 28, 2016

People have no faith in economics anymore? Do the Sexit now!

Comment on ‘Why people have no faith in economics anymore’

Blog-Reference and Blog-Reference and Blog-Reference on Jul 2 adapted to context

Mark Thoma summarizes: “In recent years the public has lost faith the in the economics profession. One reason for the lack of faith is the failure to predict the Great Recession, but the public’s dismissal of macroeconomists is based upon more than the failure to foresee the dangers the housing bubble posed for the economy.”

This, of course, is a misleading explanation. It rests on a misunderstanding of what economics is and what science is. First of all, science does NOT ‘predict the future’ because as a genuine scientist said: “The future is unpredictable.” (Feynman, 1992)

What is called prediction in science is categorically different from the commonsensical meaning of ‘predicting the future’. The sole criterion of science is true/false and not predicting the next crash or any other extraordinary event. This is the job of prophets, fear mongers, astrologers, gold bugs and other freaks/swindlers. In marked contrast, science is about invariants or timeless laws.

The problem with economics is not commonsensical prediction but that it is NOT a science yet pretends to be one. It is of utmost importance to clearly distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith onward can be summarized as utter scientific failure. A closer look at what is naively called economics as if it were a homogeneous entity shows that theoretical economics has been captured by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

As a consequence, what we actually have is Walrasianism, Keynesianism, Marxianism, Austrianism, and all four are false. This has NOTHING AT ALL to do with faith, trust or credibility but with PROOF.

Economics started as Political Economy. It tried to become a science but failed. The ultimate reason is scientific incompetence. However, the fact of the matter is that the general public cannot assess scientific competence and has to fall back on all sorts of proxies like published opinion or authority.

There is one thing that economists can immediately do to correct false expectations. Let us call this the scientific exit or Sexit for short.

The rules of conduct of the scientific community demand that the actual state of economics is at all times unambiguously communicated to the general public. This implies, as the VERY FIRST step, that the word sciences is deleted from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

Economists cannot be accused of being incapable of ‘predicting the future’ but of falsely claiming to do science. What can legitimately be demanded of Thoma and the majority of economists is to retire as soon as possible because of PROVEN scientific incompetence.

Egmont Kakarot-Handtke

Related 'Free the academy from economics' and 'Here it comes: the Sexit' and 'The irrelevance of economics' and 'Political economics: as worthless as ever'.

***
REPLY to Lorenzo Meninato on Jun 29

You say “I’m not quite sure what you mean.”

Science is well-defined since more than 2000 years: “Research is in fact a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant 1994)

According to the criteria of material/formal consistency Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLE false. Because of this, economics is OUT of science. Which part of OUT do you not understand?

***
COMMENT on George H. Blackford on Jun 29

You write: “The central argument of Keynes’ General Theory is that classical economists put the cart before the horse in assuming that the economic progress is driven by savings and investment.”

Keynes was  a busy agenda pusher but not a profound thinker. He defined the formal core of the General Theory as follows: “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 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., 2010, p. 12)

Let this sink in, Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular ALL I=S/IS-LM models.

Neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized Keynes’ logical blunder until this day (2011; 2014). Your RWER article shows that you, too, are way behind the curve.*

References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2014). 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. London, Basingstoke: Macmillan.
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

* See also cross-references

Related 'Why should people trust failed scientists?' and cross-references Incompetence.

Does economics advance the understanding of economic reality?

Comment on Dean Baker on ‘In the wake of Brexit, will the EU finally turn away from austerity?’

Blog-Reference

In part 1 of his post Dean Baker writes: “In the lead up to the Brexit vote, there was much discussion of punishment. Wolfgang Schäuble, the finance minister of the European Union, had made several comments implying that the UK would be punished if its people voted to leave the European Union.”

In part 2 of his post he writes: “The EU leadership apparently likes balanced budgets. It may be something their parents told them. But the EU and the world ... needs to use real economics. And in real economics, the message is clear, they need to run larger budget deficits to boost economies and reduce unemployment.”

The first part is a fine example of folk psychology which informs us that actions are conditioned by the principle of punishment/reward. This kind of ‘explanation’ goes back at least to Mesopotamian angry-good-drowns-humanity stories and it appeals very much to neurotics of the sado-maso-type. Heterodoxy cannot contribute much to the advancement of economics by repeating this psycho-crap which has been ladled out at every street corner since 5000 years.

Economics is about how the monetary economy works and NOT about second-guessing politicians or the people.

The second part alludes to Keynes’s employment theory and advocates deficit spending. There is not much to say against deficit-spending except that it is rather commonsensical and NOT based on valid economic theory. The reason is simple: there is no valid employment theory. More precisely, both orthodox and Keynesian employment theories are PROVABLE false. In other words, neither Orthodoxy nor Heterodoxy understands economic reality.

So, all that society gets from the failed science of economics is folk psychology, confused and scientifically unfounded economic policy advice, and brain-dead political propaganda.*

Egmont Kakarot-Handtke

* For the correct employment equation see ‘Unemployment ― the fatal consequence of economists’ scientific incompetence’. See also ‘Iatrogenic economics

June 27, 2016

Political economics: as worthless as ever

Comment on Lars Syll on ‘Brexit — a rejection of mainstream economics’

Blog-Reference

You quote Ann Pettifor: “The British people have today rejected this mainstream, orthodox economics, a strain of fundamentalism that they may rightly judge has proved deleterious to their own economic interests.”

That is off the wall. We can be sure that the British people could not care less about economics because they simply do not know what it is. Economists themselves do not. Because of this, it is of utmost importance to clearly distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith onward can be summarized as utter scientific failure. A closer look at what is naively called economics as if it were a homogeneous entity shows that theoretical economics has been captured by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis and Pettifor and Keen.

What people can see and experience of economics is always political economics. And they judge it in light of their situation/interests and NEVER whether it is scientifically true or false. Because of this, it is ridiculous to say that the British people have “rejected mainstream economics”.

Economics is scientifically worthless. Walrasian, Keynesian, Marxian, and Austrian economists are groping in the dark with regard to the two most important features of the market economy: (1) the profit mechanism, and (2), the price mechanism. The fatal fault lies in the fact that economists argue from the micro level upwards to the economy as a whole. And here the fallacy of composition regularly slips in. To get out of failed orthodox economic theory requires a paradigm shift and NOT a political referendum of an utterly confused populace.

There is no way around this: “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)

It is a fact that economists do not have the true theory — Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLE false. Therefore, as a matter of principle, economic policy advice has no better scientific foundation than old Roman poultry entrails reading. Educated common sense and personal opinion is all that economists have achieved in more than 200 years.

This point gets entirely lost in actual political discussions because the criterion for political economics is whether or not it fits an agenda and NOT whether the underlying theory is true or false. As soon as political economics dominates, the very task of the theoretical economist — to explain how the monetary economy works — is forgotten and the well-defined scientific standards are ignored.

Both, orthodox and heterodox economists have to be reminded of what science implies and why politics and science have to be strictly separated: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)

Lacking the true theory, neither orthodox nor heterodox economists can tell which “consequences follow from certain causes” and which means “are the most effectual to obtain certain ends”. This holds in particular for employment theory.*

As a rule of thumb, the British or European people cannot expect scientifically valid advice from economists but they can expect that politicians always find someone who is prepared to act as a “scientific” fig leave for actions that have been decided politically. There is not much difference between right or left in this respect.

Egmont Kakarot-Handtke


References
Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected View of the Principles of Evidence and the Methods of Scientific Investigation, volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

* See ‘Iatrogenic economics’.

Lost in the wood

Comment on Jared Bernstein on ‘From the joint dept. of: capitalism is remarkable, and we are a very sick society’

Blog-Reference

(i) Your blog is clearly labeled ‘On the economy’.

(ii) We have seen on the preceding thread* that you have no idea about how the actual economy works and cannot even tell the difference between income and profit.

(iii) All this is disqualifying enough for an economist but it does not stop you from making things even worse by moralizing about the sick society. May I remind you that society is the subject matter of sociology/social philosophy and that the subject matter of economics is the economy.

(iv) The sickness of economists in general and you in particular consists in the fact that they have no idea of how the economy works and instead of shutting up they try to cover their failure with waffling about society.

Egmont Kakarot-Handtke


* See ‘Iatrogenic economics

June 23, 2016

Hayek ― agenda pusher or scientist?

Comment on Syll/Solow on ‘Good Hayek vs. Bad Hayek’

Blog-Reference

Robert Solow is here quoted with: “The Good Hayek was a serious scholar who was particularly interested in the role of knowledge in the economy (and in the rest of society).” (See intro)

This is a misunderstanding that is grounded in the fact that most people/economists have no proper understanding of what economics is all about. Therefore it is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The history of political economics from Adam Smith to Hayek and beyond can be summarized as utter scientific failure. A closer look at what is naively called economics as if it were a homogeneous entity shows that theoretical economics has been captured by the agenda pushers of political economics. Smith and Ricardo fought for Liberalism, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis.

It is a widespread misunderstanding to think that people who talk about the economy understand how the economy works. Hayek’s ‘Road to Serfdom’ is a political pamphlet and it is not backed by the true economic theory simply because Hayekian economics is scientifically worthless storytelling until this day.

Hayek, of course, had the right to write political pamphlets, to defend capitalism, to support Thatcher, to found the political club Mont Pelerin and to dabble in sociology and political philosophy. One thing, though, should be perfectly clear: the moment an economist starts with politics he leaves economics, understood as a science, for good.

Political economists of all stripes are characterized by four common traits: (i) They are mainly occupied with sociology, psychology, anthropology, political science, history, law/institutions, Darwinism/evolution theory, social philosophy, etcetera. That is, they miss the essentials of economics proper.* (ii) They use theoretical economics as a means/support for their agenda. By this, they abuse science unknowingly or knowingly. (iii) As far as they have tried to underpin their agenda theoretically it can be proved in each case that their approaches lack formal and material consistency. (iv) They have no idea about how the actual economy works because they lack the correct profit theory.

It is not decisive what the political agenda is: ALL of political economics is cargo cult science (Feynman’s term). Political economics has not produced anything of scientific value since Adam Smith.

One task of Heterodoxy is to refute false theories. The more important task, though, is to develop the true theory of how markets work (2015). Hayek argued that the existing economic system is self-adjusting. He could never prove it in a way that satisfies the criteria of material and formal consistency. Neither could General Equilibrium Theory. Worse, it can be rigorously proved that the existing economy is NOT self-adjusting** and that it must ― inescapably programmed by the Profit Law ― eventually break down (2014) even if the price mechanism is perfectly flexible and perfectly efficient. Hayek never understood the profit mechanism which is the ESSENTIAL feature of the existing economy.

Not one of the political economists and agenda pushers from Smith to Hayek will in the final assessment be accepted as scientist.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL

* Economics is the science which studies how the monetary economy works and NOT how society works, which means methodologically, it is NOT subjective-behavioral but objective-structural. See the working paper ‘Objective Principles of Economics
** See post ‘Could we, please, all focus on the key question of economics?

Related 'Why Hayek was not a scientist' and 'Hayek was not an economist' and 'Hayek: mad, bad, or just another incompetent economist?' and 'Hayek or how economists miss their subject matter since more than 200 years'

June 22, 2016

Iatrogenic economics

Comment on Jared Bernstein on ‘Do economists understand economies?’

Blog-Reference

You summarize “... something seems quite wrong with contemporary economics.” That is not quite accurate because economics is wrong since Adam Smith (2014).

Walrasian, Keynesian, Marxian, and Austrian economists are groping in the dark with regard to the two most important features of the market economy: (1) the profit mechanism, and (2), the price mechanism. The fatal fault lies in the fact that economists argue from the micro level upwards to the economy as a whole. And here the fallacy of composition regularly slips in. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed microfoundations to entirely new macrofoundations.*

In the following, a sketch of the formally and empirically correct price, employment, and profit theory is given. The most elementary version of the objective structural employment equation is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete AND testable employment equation ― which is systemic and entirely free of green cheese behavioral assumptions like constrained optimization or rational expectations ― is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’s arguments about the relationship between aggregate demand and employment. Not much new here, so let us turn to the factor cost ratio rhoF as defined in (iii). This variable embodies the price mechanism which, however, does NOT work as the representative economist hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

This is the exact opposite of what standard economics says about the functioning of the price mechanism. Indeed, economists do not understand how the actual economy works and this explains why their standard policy advice regularly WORSENS the situation. In healthcare, this is called iatrogenesis (Wikipedia).

For the relationship between real wage, productivity, profit, and real shares see (2015, Sec. 10)

The correct profit equation reads Qm = Yd+I-Sm (2014, p. 8, eq. (18)). Legend Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditure. The profit equation gets a bit longer when import/export and government is included.

Note that OVERALL profit and by consequence the income distribution has NOTHING to do with productivity or low wages or market power. These and other factors affect only the DISTRIBUTION of overall profit BETWEEN firms. What holds on the firms’ level does NOT hold for the economy as a WHOLE. Not to realize this is the fatal insufficiency of economists’ feeble-minded ruminations about the relationship between (average) wage rate, price, productivity, and employment. In sum, economists got the Phillips curve and the concept of the ‘natural rate of unemployment’ provable wrong (2012).

The ultimate cause of secular economic stagnation is the secular intellectual stagnation of economists.

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
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

* Students are referred to the working papers for the analytical details

***
REPLY to Smith on Jun 24

The question of this thread is ‘Do economists understand economies?’ and the answer is NO. Neither Walrasianism, Keynesianism, Marxianism nor Austrianism satisfies the criteria of material and formal consistency. Economics is a failed science.

Because of utter scientific incompetence economists have never risen above the level of storytelling. This applies also to your post which explains the economy as a machination of rich people. You simply do not grasp the difference between a scientific and a yellow-press explanation.

Imagine for a moment an aircraft flying from, say, New York to Paris. Now we can ask why? One way to answer the question is to speculate about the motives and reasons of the passengers, the pilot, the crew, the flight controllers, and the managers and stockholders of the airline. The other way to look at the flight is to think about the laws of aerodynamics, thermodynamics and so forth.

It is pretty obvious that an aircraft does NOT fly because people have a motive to fly. This is animistic thinking. This thinking yields the same trivial psychological crap over and over again. Notice: whatever the subjective motives/actions of passengers/crew are, they do — as a matter of principle — NOT explain the phenomenon of flight in the abstract.

Just like the phenomenon of flight has to be understood in objective physical terms the functioning of the monetary economy has to be understood in objective systemic terms. What is needed to begin with are the objective laws of economics, for example, the Profit Law.

You, too, have NO idea of what profit is and how markets interact.* Instead, you tell the bad guy/good guy story. People like this sitcom stuff but it is NOT science.

To recall: since Smith and Marx economics claims to be a science but the feeble thinkers and strong blatherers that call themselves economists have until this day not figured out how the monetary economy works and how the product and the labor market interact and whether the system is self-correcting or not.**

Either economists stop storytelling and start to do their scientific homework or they will be thrown out of science and sued for damages.

* See ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’.
** See ‘Could we, please, all focus on the key question of economics?

***
REPLY to Smith on Jun 25

You say: “Economists I admire, mostly dead, Keynes and John Kenneth Galbraith, I think they had a pretty good understanding.”

You obviously overlook this point: the decisive criterion in science is true/false and NOT like/dislike.

You overlook, secondly, that Keynes was not such a profound thinker. He defined the formal core of the General Theory as follows: “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 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., 2010, p. 12)

Let this sink in, Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Now it is pretty obvious because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S/IS-LM models.

But things get from bad to worse. Neither Post Keynesians nor New Keynesians nor Anti-Keynesians have realized Keynes’s logical blunder until this day (2011). And ― ridiculous to the extreme ― Paul Krugman bases his economic analysis and policy advice still on IS-LM (2014).

The question of this thread is ‘Do economists understand economies?’ and the unequivocal answer is NO. From the history of economic “thought” is known that economists swallow every brain-dead junk from utility maximization to supply-demand-equilibrium to I=S without turning a hair. From all scientific write-offs, economists are the worst and this certainly includes you.

References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
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

Not a question of simplicity but of stupidity

Comment on Paul Krugman on ‘Tl;dr and Modern Macroeconomics’

Blog-Reference and Blog-Reference

Krugman defends the simplicity of IS-LM against more elaborate modeling approaches: “What worries me is the effective prohibition on simple, ad hoc models that sometimes yield most of the insight ... in a form that is much more useful for real-world policy discussion.”

The core issue, though, is NOT about simple or elaborate but about true or false. And the crucial point is that IS-LM is PROVABLE false. What is worse, it is false since Keynes/Hicks and neither the After-Keynesians in general nor Krugman in particular has realized this until this day (2014).

Keynes formulated the formal core of the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

This elementary syllogism is conceptually defective because Keynes never came to grips with profit (Tómasson et al., 2010, p. 12). As a result, all I=S/IS-LM models and the Keynesian multiplier and Post-Keynesianism and New Keynesianism are false (2011).

Because neither IS-LMers nor DSGEers have the true theory their economic policy advice has NO scientific foundation whatsoever but is at the same level as poultry entrails reading. Hence, Paul Krugman has ONE valid point: to read from simple entrails is for all communicative purposes better than to read from more elaborate entrails. This, though, should not distract from the fact that simple scientific garbage is still garbage. To do economics without an idea of what profit is is a hopeless undertaking and a reliable indicator of utter scientific incompetence of economists in general and Paul Krugman in particular.*

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. 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 Keynes, J. M. (1973). The General Theory of Employment Interest and Money.  London, Basingstoke: Macmillan.
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

* See ‘I=S: Mark of the Incompetent’.

***
REPLY to Paul Mathis on Jun 22

Your examples relate to microeconomic profit. Keynes, of course, mentioned profit in the General Theory but never understood it: “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., 2010, pp. 12-13, 16)

Keynes, though, is not alone as one can glean from the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

The fact of the matter is that economists have no idea since Adam Smith what profit is (2014). This includes Paul Krugman and this is why his IS-LM based economic policy analysis is scientifically worthless.*


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. (2014). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL
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

* See ‘Profit and the collective failure of economists’.

***
REPLY to Peter on Jun 23

Compared to IS-LM the quantity of credit theory of Werner is clearly superior. See also: ‘Loanable Funds vs. Endogenous Money: Krugman is Wrong, Keen is Right’.

***
REPLY to nastyboy on Jun 23

The idea that wages and profits are antagonists quite naturally emerges from the observation of a single firm but is patently false when generalized for the economy as a whole. This elementary logical blunder (fallacy of composition) started with Smith, Mill, Ricardo, Marx and is still alive in modern macroeconomics. See also ‘Profit for Marxists’.

June 21, 2016

How to get rid of the silly Queen

Comment on Lars Syll on ‘Economics — spending time doing silly things’

Blog-Reference and Blog-Reference

Currently, economists are in the mode of thorough self-critique. Yes, we have done too much math, yes, our reduction of multi-dimensional homo sapiens to one-dimensional homo oeconomicus has been rather one-sided, yes, the Chicago free market philosophy has gone over the top, yes, there has been too much abstract model building and too little empirics and, yes, we have done all these silly things because “the profession” has told us so. Economics, it seems, has all these years not at all been about the economy but about signaling: “So DSGE might be an expensive way of proving that you’re willing to spend a lot of time and effort doing silly stuff that the profession tells you to do.” (See intro)

Why are the once proud heralds of the famous Queen of the so-called social sciences all of a sudden so conspicuously back-pedaling and ducking and discounting relevance? This question opens a wide field for speculation and second-guessing. But, clearly, to enter this playground of storytellers, gossipers, and wish-washers would be beyond silly. The very practical point is to take the opportunity and to get people who have disqualified themselves by doing silly things and talking nonsense finally out of science.

Economics is a failed science. Let us briefly spot the causal blunders. These are NOT located in the theoretical superstructure: “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.” (Hutchison 1960)

Standard economics is built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub 1985)

Methodologically, these premises are forever unacceptable but economists swallowed them hook, line and sinker from Jevons/Walras/Menger onward. The failure of methodological individualism and all other psycho/socio-approaches can be stated as an impossibility theorem: NO way leads from the explanation of human nature/behavior/action to the explanation of how the economic system works.

Keynes, as the other main protagonist, defined his set of foundational propositions in the General Theory as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.”

This elementary syllogism is conceptually defective because Keynes never came to grips with profit. As a result, all I=S models and the Keynesian multiplier are false.

Conclusion: The one silliness of economists consists in the inability to spot the errors/mistakes in their respective axiom sets and to blindly build their respective theoretical edifices higher and higher upon unsuitable foundations. This holds also for Marxianism and Austrianism. The other silliness consists in the repetitive critique of well-known defects: “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)

And here is how to transcend the silliness of Orthodoxy and Heterodoxy: the forever unacceptable microfoundations have to be replaced by macrofoundations. This is achieved with this set of objective-structural foundational propositions. (A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The investment good sector and more and more individual firms come in at a later stage. This increases complexity step by step. So, what we initially have with A1 to A3 is the pure consumption economy as the most elementary economic configuration. These premises are certain, true, primary, entirely free of green cheese behavioral assumptions, and therefore perfectly suited as the foundations of an “edifice that one wishes to expand and to build higher while preserving its stability.” (Hilbert 2005)

Human behavior, tastes, choices, or society have no durable underlying structure, but the monetary economy has and it is given in the most elementary case by A1 to A3. A system can be unambiguously defined.

Economics has to step down as Queen of the so-called social sciences in order to eventually become King of the system sciences. This paradigm shift, clearly, is beyond the means of the silly folks of traditional orthodox and heterodox economics.

Egmont Kakarot-Handtke

***
REPLY to Ken Zimmerman on Jun 24

You write: “As sociologist Edward Ross pointed out to the AEA in 1889, ignorance of custom, tradition and authority left economists ill-equipped to carry out their analysis of trade. It’s my view Ross hit the error of economists today on the head.”

The fundamental error of Ross and you is to assume that economics is about ‘how society works’. No! This is the subject matter of sociology. Economics is about ‘how the economy works.’ Society and economy are intertwined but must be separated analytically.

Since Adam Smith, economics claims to be a science. Methodologically, it started as a mixture of sociology and political science: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, ...” (Mill, 1874, V.39)

With respect to the subject matter there is no difference between Mill and Marx “My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, ...” (Marx, 1906, M.9)

With Jevons/Walras/Menger the focus shifted to methodological individualism and economics became a mixture of dilettantish psychology, sociology, and political science. This approach has failed abysmally.

Economics is NOT a science of Human Nature or individual/social/political behavior but of the behavior of the monetary economy. Accordingly, the correct definition of the subject matter is objective/structural/systemic: “Economics is the science which studies how the monetary economy works.”

As a consequence, the overdue Copernican turn in economics consists in the methodological switch from behavior-centered bottom-up, i.e. subjective microfoundations, to structure-centered top-down, i.e. objective macrofoundations of the world economy. All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/Darwinism/evolution theory, political science, social philosophy, etcetera) and are taken in from these by way of multidisciplinary cooperation IF NEEDED.

Economics is NOT a science of behavior (Hudík, 2011).* Economics is not a so-called social science like psychology/sociology and not a natural science like physics but a system science.

By the way, it seems to have escaped your attention that Luhmann has defined sociology as a system science (1995) and this, indeed, is the common methodological platform of sociology and economics (2014). With Edward Ross of 1889 you are way behind the curve.


References
Hudík, M. (2011). Why Economics is Not a Science of Behaviour. Journal of Economic Methodology, 18(2): 147–162.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Luhmann, N. (1995). Social Systems. Stanford, CA: Stanford University Press.
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL

* See also cross-references

***
REPLY to Ken Zimmerman on Jun 27

For somebody with a small horizon the earth is for all practical purposes flat and all empirical evidence is so convincing that it is almost impossible to transcend this commonsensical world view and ever get out of the tiny box. All the more so because science is as a rule counter-intuitive and requires the emancipation from small scale idiosyncratic personal experience.

Because of this, nothing seems more commonsensical than your assertion: “All that happens, I repeat, ALL is created via interactions (relationships) among a number of actors.” As a matter of fact this view ― let us call it the Science-of-Man fallacy ― is as old as the hills. It goes back to Hume.

“And as the science of man is the only solid foundation for the other sciences, so the only solid foundation we can give to this science itself must be laid on experience and observation.” (2012, Introduction)

It reappears with the Austrian sect.

“Mises’ contribution was very simple and at the same time extremely profound. He pointed out that the whole economy is the result of what individuals do.” (Foreword, von Mises, 2007, p. v)

And it is the tenet of Orthodoxy.

“It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994, p. 1)

The common denominator of all Science-of-Man approaches is that they are scientific failures. Not much profound insight about how the economy works has come from them. Until this day the representative economist cannot even tell the difference between income and profit.

Consistent with the low performance of flat-earthers in general you have not put forward one single testable proposition about an important economic relationship. This is rather odd for a person who claims to apply the right methodology. In science, claims and opinions do not count for much, only proof counts.


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Hume, D. (2012). A Treatise of Human Nature. Project Gutenberg EBook. URL
von Mises, L. (2007). Human Action. A Treatise on Economics, volume I. Indianapolis, IN: Liberty Fund. (1949).

***
REPLY to Ken Zimmerman on Jun 28

(i) You say: “The entire structure of western (but not all sciences) rests on the assumption that’s possible to go from an observation to conclusions about that observation.”

False. This holds only for the proto-scientific stage. For details see this chart.

The scientific stage starts with a well-articulated theory which is based on axioms. Axioms in turn are NOT DIRECTLY based on naive observation/experience but are a sophisticated logical construct: “If then it is the case that the axiomatic basis of theoretical physics cannot be an inference from experience, but must be free invention, have we any right to hope that we shall find the correct way?” (Einstein, 1934, p. 167)

As we know from history, scientists have found the correct way. You definitively do not understand the specific characteristics of science and mess it up with observationism: “The Baconian dogma I have in mind asserts the supreme merits of observation and the viciousness of theorizing speculation. I shall call this dogma, briefly, by the name ‘observationism’.” (Popper, 1994, p. 84)

(ii) You say: “Putting forth testable propositions about economic interactions is not my job. I’m not an economist. Rather, it’s your job as an economist. As an historian I don’t test propositions, I examine the stories of how humans live together.”

True. Historians are storytellers and second-guessers but NO scientists. Because of this, they have NOTHING useful to say about methodology. Psychologists, too, have not much to say because economics is NOT about human psychology/behavior but about the behavior of the economic system. Economics is NOT a so-called social science but a system science. For more about the cargo cult science psychology see Feynman on Wikipedia or YouTube.

(iii) You say: “Finally, following this dictum if you can find some other variables to measure and test except relational ones let me know. That would change everything. A brand new universe would emerge.”

Yes, indeed. Here you have the First Economic Law which defines the measurable and testable economic relations for the elementary consumption economy which in turn are entirely FREE of green cheese psychological/behavioral assumptions.* If you think this equation is false you can try to empirically refute it. This is how science works.

References
Einstein, A. (1934). On the Method of Theoretical Physics. Philosophy of Science, 1(2): 163–169. URL
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality., chapter Science: Problems, Aims, Responsibilities, pages 82–111. London, New York, NY: Routledge.

***
REPLY to Ken Zimmerman on Jun 29

Science is well-defined by material AND formal consistency and scientists judge and are judged according to these criteria. Genuine scientists have NO problem with these methodological essentials but the so-called social scientists have. Their persistent attempts to redefine science are understandable but pointless: either one plays according to the rules of science or one is OUT. Your view “that science is the study of the relationships among all the things, forces, thoughts, etc. that make the world and are made by it” is simply irrelevant.

June 19, 2016

Don’t tell me that Krugman’s economics is false, tell me instead what is true

Comment on Lars Syll on ‘Paul Krugman — mistaking the map for the territory’

Blog-Reference

Science is about true/false. The first error/mistake of the representative economist is to mess up things by tacitly replacing the scientific distinction true/false by the political distinction right/left (see graccibros’s post above). With this methodological shell game theoretical economics degenerates to political economics. Political economics is scientifically worthless since Adam Smith and Karl Marx.

The fundamental problem of economics is that it claims to be a science but is not. In fact, economics violates the standards of material and formal consistency on a daily basis, that is, it is PROVABLE false. This holds for Walrasianism, Keynesianism, Marxianism, and Austrianism.

By implication, ALL textbooks since Samuelson’s prototype of 1947 are false. This includes Krugman, Mankiw, Blanchard, Lavoie, Rodrik and so on.*

Krugman’s blunder does NOT consist of simplification or abstraction or thought experiments but of taking the wrong axiomatic starting point. Boiled down to the essentials: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman’s blog). Maximization-and-equilibrium are nonentities and this neatly explains why standard economics has never found a counterpart in the real world. The neoclassical map is for all practical purposes as good as the Map of Middle-earth.

The fact that Krugman’s map is worthless does NOT prove that maps are worthless, it only proves that Krugman is an unskilled map maker: “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.” (Clower, 1995, p. 308)

As a result of elementary methodological blunder ALL of Econ 101 (except plain descriptions or historical facts/data, of course) is as false as the Geo-centric theory ever was.**

Economics is still at the proto-scientific level of ‘Babylonian incoherent babble’ (Davidson) because of a manifest ‘failure of reason’: “... 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 ...” (Feyerabend, 2004, p. 72)

This failure, though, is due to the scientific incompetence of Orthodoxy AND Heterodoxy. The tragedy of traditional Heterodoxy is that it is well aware of all orthodox blunders but has no idea of how to rise above incoherent proto-scientific babble.***

The original task of Heterodoxy is ― NOT to waste time criticizing scientific write-offs like Krugman ― but to fully REPLACE all this Econ 101 maximization-and-equilibrium garbage by a superior paradigm.

Egmont Kakarot-Handtke


References
Clower, R. W. (1995). Axiomatics in Economics. Southern Economic Journal, 62(2): 307–319. URL
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.

* See ‘Coming soon: the canonical economics textbook’.
** See ‘What’s wrong with Econ 101? Economists, of course!’.
*** See ‘The scientific self-elimination of Heterodoxy’.

June 18, 2016

What’s wrong with Econ 101? Economists, of course!

Comment on David Glasner on ‘What’s wrong with Econ 101?’

Blog-Reference and Blog-Reference on Jun 29, adapted to context

Imagine for a moment, you ask a pre-Copernican astronomer directly: Is Geo-centrism true or false? And imagine further he paraphrases David Glasner as follows: ‘Geo-centrism is the distillation of almost 1500 years of rigorous thought about how to analyze the behavior of celestial bodies. What we have come up with so far is very imperfect ― more than 20 epicycles are admittedly a bit awkward ― but it is still the most effective tool we have for systematically thinking about the behavior of celestial bodies.’ (See intro)

This sounds good and reasonable and balanced, except for the fact that the answer is evasive. Worse, it is delusional. With hindsight we know that Geo-centrism had been axiomatically false and that the inconsistencies had not been localized over more than 1500 years but only papered over with epicycle upon epicycle. Eventually, though, Geo-centrism has been withdrawn from the corpus of scientific knowledge and fully replaced by Helio-centrism.

The situation in economics is exactly the same, that is, pre-Copernican. Econ 101 is still at the proto-scientific level: “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 ...” (McCauley, 2006, p. 17)

Clearly, David Glasner, Noah Smith, Mark Thoma et al. do not want to go to such extremes. Therefore, they resort to rhetorical autotomy.*

What is the lethal methodological error/mistake of Econ 101? The short answer is that it is behavior-centric, that is, it is based upon folk psychology and folk sociology. This approach does not have some minor weaknesses but is a complete failure. Therefore, the inescapable paradigm shift consists in moving from the behavior-centric approach to the structure-centric approach. This is comparable to the Copernican turn from Geo-centrism to Helio-centrism. Nothing less will do.

The defenders of Econ 101 try to avoid the conclusion of absolute failure by freely admitting the most obvious weaknesses and by issuing a barrage of disclaimers which in sum amount to: If you take this stuff seriously it’s your own fault. Don’t blame us if it does not work.

Many economists are well aware that they are scientifically lost in the wood. The problem is that they have no idea how to get out: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

So, the representative economist continues to do what he is since Jevons/Walras/Menger supposed to do: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow, 1994, p. 1). What does methodological individualism mean in detail? All variants of orthodox economics are built upon this hard core set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

It is pretty obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of standard economics is methodologically forever unacceptable. HC2, HC4, HC5 are blatant nonentities, but the representative economist swallows them hook, line and sinker since more than 140 years. Note in particular that to take equilibrium into the premises is an elementary methodological mistake which is known since antiquity as petitio principii.** Therefore, all equilibrium models are a priori false and by consequence worthless.***

To admit minor weaknesses is insufficient. The fact of the matter is that already elementary supply-demand-equilibrium is scientific garbage because it is built upon the unacceptable axiom set HC1 to HC5.

David Glasner comes close to the crucial point: “The deeper problem that I think underlies much of the criticism of Econ 101 is the fragility of its essential propositions. These propositions, what Paul Samuelson misguidedly called ‘meaningful theorems’ are deducible from the basic postulates of utility maximization and wealth maximization by applying the method of comparative statics.”

The point is: the essential propositions, a.k.a. axioms, are not fragile they are FALSE and forever unacceptable. The solution consists in moving from subjective-behavioral axioms (= microfoundations) to objective-structural axioms (= macrofoundations).

By telling the world “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” (Krugman) and by rationalizing the failure of this research programme economists confirm their hopeless scientific incompetence. The maximization-and-equilibrium approach has already been dead in the cradle. Standard economics is scientifically behind the curve since Adam Smith. That’s what is wrong with Econ 101.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
McCauley, J. L. (2006). Response to "Worrying Trends in EconoPhysics". EconoPhysics Forum, 0601001: 1–26. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* Autotomy: “Self amputation is the behaviour whereby an animal (e.g. gecko, lizard) sheds or discards one or more of its own appendages, usually as a self-defense mechanism to elude a predator’s grasp or to distract the predator and thereby allow escape. The lost body part may be regenerated later.” (Wikipedia)
** For details see ‘Petitio principii — economists’ biggest methodological mistake
*** See ‘Could we, please, all focus on the key question of economics?

***
REPLY to David Glasner on Jun 26

You say: “Physics also makes assumptions that are literally false, e.g., there is no friction. And for some problems that does not invalidate the analysis; in other cases it does.”

Nothing is more ridiculous than to compare economics with physics. Just open the Principia and see that Newton made his counterintuitive “assumptions” (= axioms*) as rigorous as possible and then compare this with Adam Smith: “But he had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter, 1994, p. 185)

Economics did not recover from this abortive start and is still at the proto-scientific level of storytelling. The ultimate reason is that economists cannot tell the difference between an abstraction/limiting case and a nonentity. Your evasive argument delivers the proof. A friction-free motion is NOT literally false but is the normality in outer space; only under the special conditions of gravity and atmosphere is uniform motion an abstraction/limiting case* (see also Cohen, 1994, p. 77 for Newton’s methodology).

So, the concept of friction-free motion does indeed have a counterpart in reality while the concept of constrained optimization or equilibrium has not. This is the defining difference between genuine science and the cargo cult science economics.

Green cheese behavioral assumptions like utility maximization or rational expectations are NONENTITIES like angels, unicorns or the Easter Bunny. Nonentities have no counterpart in reality and are methodologically forever inadmissible. The brain-dead assumptions of standard economics are definitively NOT on the same footing with the abstractions/limiting cases of physics.

Newton is famous for his ‘hypotheses non fingo’ which roughly translates to ‘I do not argue from feigned premises’, i.e., those that have no counterpart in reality. And he had been well aware that from nonentities (here = hypotheses) nothing but storytelling follows: “Those who take the foundations of their speculations from hypotheses, even if they then proceed most rigorously according to mechanical laws, are merely putting together a romance, elegant perhaps and charming, but nevertheless a romance.” (Roger Cotes, Preface, 1999, p. 386)

Because it is based on nonentities Econ 101 is nothing more than a charming romance for scientifically retarded economics students.

The precondition for economics to rise above the proto-scientific level is to replace subjective-behavioral microfoundations by objective-structural macrofoundations (2014). Econ 101 has never produced a “meaningful theorem” and is simply indefensible.


References
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.
Kakarot-Handtke, E. (2014). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Newton, I. (1999). The Principia; Mathematical Principles of Natural Philosophy. Berkley, CA, Los Angeles, CA, London: University of California Press.
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

* See Wikipedia

June 16, 2016

Unemployment ― the fatal consequence of economists’ scientific incompetence

Comment on Asad Zaman on ‘Creating full employment’

Blog-Reference

Walrasian, Keynesian, Marxian, and Austrian economists are groping in the dark with regard to the two most important features of the market economy: (1) the profit mechanism, and (2), the price mechanism. The fault lies in the fact that economists argue from the micro level upwards to the economy as a whole. And here the fallacy of composition regularly slips in. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed microfoundations to entirely new macrofoundations. In other words, the faulty axiomatic foundations of standard economics have to be replaced and Keynes’s ill-defined employment equation has to be rectified (2012).

In the following, a sketch* of the formally and empirically correct price, employment, and profit theory is given. The most elementary version of the objective structural employment equation is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete AND testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’s arguments about aggregate demand. Here, the focus is on the factor cost ratio rhoF as defined in (iii). This variable embodies the price mechanism which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R.

For the relationship between real wage, productivity, profit, and real shares see (2015, Sec. 10)

The correct profit equation reads: Qm Yd+I-Sm (2014, p. 8, eq. (18)).** Legend Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditure.

The profit equation gets a bit longer when import/export and government is included.

Note that OVERALL profit and by consequence the income distribution has NOTHING to do with productivity or low wages or market power. These and other factors affect only the DISTRIBUTION of overall profit BETWEEN firms. What holds on the firms’ level does NOT hold for the economy as a WHOLE. Not to realize this is the fatal insufficiency of economists’ feeble-minded ruminations about the relationship between (average) wage rate, price, productivity, and employment. Note also that Keynes, Marx, Kalecki, Keen, Minsky and other heterodox economists got profit PROVABLE wrong. There is nothing to choose between Orthodoxy and Heterodoxy.

Keynes’s approach is macrofounded but incomplete because he had no deeper understanding of the profit and price mechanism. Therefore, both the Walrasian and Keynesian approach produce misleading policy advice.

The structural employment equation contains nothing but measurable variables and is therefore readily testable. So, there is no need of prolonged waffling. As always in science, a test decides the matter.

The ultimate cause of unemployment is the proven scientific incompetence of orthodox AND heterodox economists since more than 200 years.

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
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

* Students are referred to the working papers for more details.
** See Wikimedia here or here or here.

June 14, 2016

Wrong question, wrong answer

Comment on Stephen Williamson on ‘Econ theory as signaling?’

Blog-Reference

Noah Smith starts his post with the circumspect question: “Assuming ... DSGE models really don’t work, why do so many macroeconomists spend so much time on them?”

Note, that he does not straightforwardly assert: “DSGE does not satisfy the scientific criteria of material and formal consistency.”

Stephen Williamson takes this clear signal of spinelessness as an invitation and shifts the issue rhetorically away from the crucial point by starting the second-guessing meta-communication game: “When I read that, here’s what I think you’re thinking. ‘Don’t work’ means useless.”

Noah Smith is now trapped in a very inconvenient corner and he gets the knockout: “Now, most of what I do would fall under ‘DSGE,’ if I take the term literally. I’m somewhat outside the mainstream, but I’ve bought into the idea that formal modeling is useful, optimization is useful, RE is useful. So, I think you’re telling me that what I know is useless, and what I do is useless. And I get paid to do what I do, which is full time research in macro, giving policy advice, etc. By implication, it seems you’re saying that you could do my job as well or better than I can. Is that correct?”

No! For heavens sake, no! Everybody knows that Noah Smith never wanted to say that he could do Stephen Williamson’s job better.

So, let us now get out of this ridiculous little game and put things straight.

(i) DSGE is provable false according to the scientific criteria of material and formal consistency.

(ii) What the proponents of DSGE including Stephen Williamson offer as knowledge is NOT knowledge=episteme but opinion=doxa. “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). DSGE is NOT the true economic theory. Just the contrary: DSGE is axiomatically false.

(iii) Because they do not have the true theory economic policy advice of the proponents of DSGE has NO scientific foundation but is at the same level as poultry entrails reading.

(iv) Right policy depends on true theory. Therefore, to say what the proponents of DSGE do is useless is an euphemism. As a matter of fact, they got price theory, profit theory, and employment theory wrong and therefore ultimately bear the intellectual responsibility for the social devastations of unemployment. DSGE is NOT a “healthy scientific activity” but a scientific failure.

What Noah Smith and Stephen Williamson are unmistakably signaling is: economists are not useless but a menace to their fellow citizens.

Egmont Kakarot-Handtke


References
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

Immediately preceding: 'Economics is locked in idiocy: How could this happen?'

June 12, 2016

Economics is locked in idiocy: How could this happen?

Comment on Noah Smith on ‘Econ theory as signaling?’

Blog-Reference

Economists can explain everything. Accordingly, Noah Smith’s rhetorical question “DSGE models really don’t work, why do so many macroeconomists spend so much time on them?” has been answered long ago with the one-size-fits-all explanation: utility maximization. “Gary Becker has suggested that a substantial resistance to the acceptance of new ideas by scientists can be explained by two familiar economic concepts. One is the concept of specific human capital: the established scholar possesses a valuable capital asset in his command over a particular body of knowledge. That capital would be reduced if his knowledge were made obsolete by the general acceptance of a new theory. Hence, established scholars should, in their own self-interest, attack new theories, possibly even more than they do in the absence of joint action. The second concept is risk aversion, which leads young scholars to prefer mastery of established theories to seeking radically different theories. Scientific innovators, like adventurers in general, are probably not averse to risk, but for the mass of scholars in a discipline, risk aversion is a strong basis for scientific conservatism.” (Stigler, 1983, p. 538)

Economists are well aware that they are scientifically lost in the wood. The problem, though, is not at all that they resist new ideas but that they have none. “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman, 1992, p. 248)

To explain the conspicuous stagnation of economics with conservatism is a bit euphemistic. The fact of the matter is that the representative economist lacks the defining characteristic of a scientist: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)

What Haack calls pseudo-inquiry and Smith calls signaling has been called cargo cult science by Feynman: “They’re doing everything right. The form is perfect. ... But it doesn’t work.”

The representative economist does exactly what he is supposed to do: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow, 1994, p. 1)

What does methodological individualism mean in detail? All variants of orthodox economics are built upon this set of foundational propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

It is pretty obvious to anyone with a modicum of scientific instinct that the axiomatic starting point of standard economics is methodologically forever unacceptable. HC2, HC4, HC5 are blatant nonentities, but the representative economist swallows them hook, line and sinker since more than 140 years. To state in 2016 that “DSGE models really don’t work” is an insufficient concession because textbook supply-demand-equilibrium is built upon the same axiom set and does not work since Jevons/Walras/Menger.

By sticking to the microfoundations HC1 to HC5 economists violate scientific standards on a daily basis. And by proudly telling the world “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point” Krugman is only signaling his and others utter scientific incompetence.

Egmont Kakarot-Handtke


References
Arrow, K. J. (1994). Methodological Individualism and Social Knowledge. American Economic Review, Papers and Proceedings, 84(2): 1–9. URL
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

Immediately following 'Wrong question, wrong answer'.

June 11, 2016

Economics: A cargo cult science from the very beginning

Comment on Noah Smith on ‘Republic of Science or Empire of Ideology?’

Blog-Reference

You complain about the influence of Koch money on economics and conclude: “The end result could be two econ professions — a dispassionate, truth-seeking one occupying the upper levels of the ivory tower, at MIT and Princeton and Stanford, doing hard math things and careful honest data work that slowly trickles out through traditional media channels ... and a second econ profession in the lower-ranked schools, doing a slightly fancier version of the kind of political advocacy now done by conservative think tanks.”

The fault in your argument is that it suggests that what goes on in the upper level of the ivory tower is science. It is not. Economics has never risen above the level of a proto-science. This is the core problem. Compared to this, the fact that part of the scientific garbage produced by economists has been sponsored by millionaires and billionaires is a minor point.

First of all, it is of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics scientific standards are observed.

Theoretical economics has to be judged according to the criteria true/false and nothing else. The history of political economics, on the other hand, can be summarized as the perpetual violation of well-defined scientific standards.

The fact of the matter is that theoretical economics has from the very beginning been captured by the agenda pushers of political economics. Smith and Mill fought for Liberalism, Ricardo, Marx and Keynes were agenda pushers, so were Hayek and Friedman, and so are Krugman and Varoufakis. Not one of the political economists and agenda pushers from Smith onward will in the final assessment be accepted as scientist.

Political economists of all stripes are characterized by four common traits:
(i) They are mainly occupied with sociology, psychology, anthropology, political science, history, law/institutions, evolution theory, social philosophy, etcetera. That is, they miss the essentials of economics proper.*
(ii) They use theoretical economics as a means/support for their agenda. By this, they abuse science unknowingly or knowingly.
(iii) As far as they have tried to underpin their agenda theoretically it can be rigorously demonstrated in each case that their approaches lack formal and material consistency.**
(iv) They have no idea about how the actual economy works.***

It is not decisive what the political agenda is: ALL of political economics is cargo cult science (Feynman’s term). Political economics has not produced anything of real scientific value since Adam Smith. After more than 200 years of dilettantism and failure there is no place for the political economists of Walrasianism, Keynesianism, Marxianism, and Austrianism among the sciences.****

The rules of conduct of the scientific community demand that the actual state of economics is at all times unambiguously communicated to the general public. This implies, as the VERY FIRST step, that the word sciences is deleted from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

Egmont Kakarot-Handtke

* See ‘Economists’ three-layered scientific incompetence
** See ‘On economists’ stupidity
*** See ‘How the intelligent non-economist can refute every economist hands down
**** For more about Political Economics see cross-references