August 28, 2016

Turning the bananatization of economics around

Comment on Dean Baker, Robert Locke, Ken Zimmerman, Dave Taylor, gracchibros et al. on ‘Trade, Truth and Trump’

Blog-Reference

Truth in the title of this thread refers to science, Trump refers to politics, or more specifically, to the ongoing bananatization of the body politics.

The first thing to notice is that science and politics do not mix, never did, and never will. Hence, a decision has to be made: either―or. According to the still accepted self-definition economics is a science: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935)

If economics cannot satisfy the well-defined criteria of science ― material and formal consistency ― it faces the option of either to leave science voluntarily or to be thrown out eventually. This is not a catastrophe, though, economics can live happily thereafter as part of the entertainment industry with grand debates about free markets, voluntary unemployment, housing bubbles, the absurd distribution of income/wealth, and taxation as legalized theft. All that has to be done is to renounce the title of science. Because to keep this title much longer would be misleading and even fraudulent.

Walrasianism, Keynesianism, Marxianism, Austrianism is materially/formally inconsistent. In other words, they are all scientifically indefensible. The problem is that all four approaches are tied to political groups/interests and are used as a means of persuasion/ propaganda/ justification. The current versions of economics have no scientific raison d’être, merely some political utility.

When Krugman supports the Democrats, when Wren-Lewis and Keen support Corbyn, when Varoufakis fights for democratizing the Eurozone, has this anything to do with science? What have they and Hayek and Keynes and Friedman in common? NEITHER of these so-called economists has a scientifically valid theory about how the economy works. So, ALL arguments ― right-wing/left-wing does not matter ― are scientifically worthless.

Political economists have made economics a banana science. The mission of Heterodoxy is to switch from the four degenerated research programs to a progressive research program.*

The paradigm shift involves a focusing on the subject matter of economics. Needless to emphasize that economic history, history of scientific thought, psychology, sociology, anthropology, philosophy, religion, literature, political science, biological evolution, or ethics are somehow interwoven with economics but they do not belong to economics proper. The insights of these disciplines are imported into economics in the normal interdisciplinary process IF NEEDED.

That there never has been any problem with borrowing from other disciplines is clear since J. S. Mill: “[Economics], therefore, presupposes all the physical sciences; it takes for granted all such of the truths of those sciences as are concerned in the production of the objects demanded by the wants of mankind; or at least it takes for granted that the physical part of the process takes place somehow. It then inquires what are the phenomena of mind which are concerned in the production and distribution of those same objects; it borrows from the pure science of mind the laws of those phenomena, and inquires what effects follow from these mental laws, acting in concurrence with those physical ones.” (Mill, 1874)

The point of interdisciplinary cooperation is that economics has NOTHING to offer in return because economists ― orthodox and heterodox alike ― have no scientifically valid theory of how the monetary economy works. They do not even understand what profit is.** In other words, economists have not done their scientific homework. What they have done instead is to entirely ignore other disciplines and to apply their do-it-yourself folk psychology (e.g. utility maximization), folk sociology (e.g. methodological individualism), and even folk physics (e.g. well-behaved production functions). How weird is this: “Indeed, here we find the neoclassical economist dictating the laws of physics to the physicist!” (Mirowski, 1995)

The banana economics of DSGE, RBC, Post-New-After-Keynesianism, however, has its counterpart in the banana politics of the presidential candidates. This gives economists the opportunity to join agenda pushing with their vacuous scientific expertise.

Economics has to entirely withdraw from politics and to focus on how to perform the scientific U-turn called paradigm shift. The new definition of the subject matter is: Economics is the science which studies how the monetary economy works.

Egmont Kakarot-Handtke

* See chart
** See post 'How the intelligent non-economist can refute every economist hands down'

Immediately preceding 'Failed institutions'

August 27, 2016

Debt and other unsolved economic problems

Comment on Lars Syll on ‘The real debt problem’

Blog-Reference

Economics virtually started with the debt problem: “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)

After more than 200 years economists still have not solved the debt problem. What Lars Syll’s intro clearly shows is utter confusion which, indeed, is the natural state of economists (2013).

The ultimate methodological reason of the failure to get out of inconclusive wish-wash and to reach logically/empirically consistent conclusions is rather obvious:
― Barro, for example, argues within the Walrasian paradigm.#1
― Lerner, for example, argues within the Keynesian paradigm.#2

Because both sides start from different premises/axioms they forever talk past each other. It is methodologically IMPOSSIBLE that the two paths of arguments ever met. What is worse, both the Walrasian and the Keynesian set of premises/axioms is provable false. The methodological insanity is aggravated by the fact that both sides incessantly flip-flop between theoretical and political arguments. This means that the debate is programmed to get lost with absolute certainty in some surreal parallel universe.

What has to be done instead is to put the formal foundations straight: “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, p. 5)

Because there cannot be a synthesis of Walrasian microfoundations and Keynesian macrofoundations and because both axiom sets are provable false the solution consists in a paradigm shift, that is, in the reconstruction of economics from entirely new formal foundations.#3 For an exhibit of the current and future state of economics see Wikimedia.

Policy guidance must be based on a materially/formally consistent theory or it is worthless or even harmful: “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)

Neither the Walrasian nor the Keynesian theory of debt is true. The real problem of economics are incompetent economists.

Egmont Kakarot-Handtke


References
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon Press.
Hutchison, T.W. (1960). The Significance and Basic Postulates of Economic Theory. New York, NY: Kelley.
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
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.

#1 The Walrasian paradigm is formally defined by these hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985)
#2 The Keynesian paradigm is formally defined by these axioms: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (GT, p. 63)
#3 See ‘From Orthodoxy to Heterodoxy to Sysdoxy

Related 'Keynesianism as ultimate profit machine' and cross-references Debt

August 25, 2016

Sumner’s moronomics

Comment on merijntknibbe on ‘A schocker for Sumner’

Blog-Reference

As PeterP says: “Major mistake: you took Sumner seriously.” Sumner cobbled five theoretically unfounded assertions together, christened them voodoo AD, and pseudo-refuted them with selected examples from different times and countries. This is moronomics.

However, where Sumner is right is that old Keynesianism from the 1960s has already been false and that not much has improved with Post-New-After-Keynesianism. On the other hand, Orthodoxy has degenerated since Keynes to the absolute zero point of DSGE.

After more than 200 years there is no such thing as a valid employment theory. To get out of failed economics requires nothing less than a paradigm shift.

In the following a sketch of the formally and empirically correct employment theory is given. A rather elementary version of the objective structural employment equation (2012) is shown on Wikimedia.

From this equation follows inter alia:
(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. Empirical testing has to take the variations of ALL variables into account.

Items (i) and (ii) cover Keynes’s arguments about aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provable false (see 2012). The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist falsely assumes. As a matter of fact, overall employment (in the world economy or a closed national economy) 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).

So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (average expenditure ratio, investment expenditures etc.) or by INCREASING the AVERAGE wage rate (more precisely by increasing the factor cost ratio rhoF) or by a combination of the two. Note that increasing the average wage rate is not the same thing as increasing the minimum wage).

The Keynesian approach is macrofounded but incomplete because Keynes had no deeper understanding of the price and profit mechanism. Microfounded employment theory, though, is even worse. Both, the Walrasian and Keynesian approaches have produced counterproductive policy advice. Unemployment is ultimately the result of theory failure. The scientific incompetence of economists causes probably more human and material damage than natural or political disasters.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

August 22, 2016

Demystifying employment theory and policy

Comment on Adair Turner on ‘Demystifying Monetary Finance’

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: the price mechanism and the profit mechanism. The fault lies in the fact that economists argue from false premises, that is, Walrasianism in all shapes and forms (DSGE, RBC, AD/AS etc.) argues from unacceptable microfoundations, and Keynesianism in all shapes and forms argues from false macrofoundations (2011). To get out of failed economics requires nothing less than a paradigm shift.

In the following a sketch of the formally and empirically correct employment theory is given. A rather elementary version of the objective structural employment equation (2012) is shown on Wikimedia.

From this equation follows inter alia:
(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.

Items (i) and (ii) cover Keynes’s arguments about aggregate demand, which have been commonsensically right but formally defective. More precisely, Keynes’s multiplier is provable false (see 2012). The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which works very different from what the representative economist falsely assumes. As a matter of fact, overall employment (in the world economy or a closed national economy) 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).

So, in simple terms, full employment (in any definition) can be achieved by increasing overall demand (expenditure ratio, investment expenditures etc.) or by INCREASING the average wage rate or by a combination of the two.

The Keynesian approach is macrofounded but incomplete because Keynes had no deeper understanding of the price and profit mechanism. Both, the Walrasian and Keynesian approaches have produced counterproductive policy advice. Unemployment is ultimately the result of theory failure.

The arguments for helicopter money are covered with items (i) and (ii). What has been overlooked so far is that deficit spending (with or without helicopter money) has massive distributional effects. Roughly speaking, the household sector’s and public sector’s deficits reappear one-to-one as monetary profit of the business sector (2015). Ultimately, helicopter money is a free lunch for the business sector.

The employment equation suggests a better way to full employment. The factor cost ratio rhoF translates roughly into the policy recipe (for a closed national economy): if the central bank wants an average inflation rate of, say, 2 percent and the average productivity growth is, say, 1.5 percent then the average wage rate must rise with 3.5 percent until full employment is established. The crucial point is that by using the price mechanism the known drawbacks of deficit spending/helicopter money are greatly reduced.

Egmont Kakarot-Handtke


References
E.K-H (2015). Keynesianism as ultimate profit machine. Blog post. URL
Kakarot-Handtke, E. (2011). Why Post Keynesianism is Not Yet a Science. SSRN Working Paper Series, 1966438: 1–20. URL
Kakarot-Handtke, E. (2012). Keynes’s Employment Function and the Gratuitous Phillips Curve Desaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL

August 21, 2016

Nothing to choose between Orthodoxy and traditional Heterodoxy

Comment on Noah Smith on ‘Heterodox macro ― a reply to some replies’

Blog-Reference and Blog-Reference on Aug 22 adapted to context and Blog-Reference on Sep 17

All that has to be said about formalization/mathiness has already been said by the great heterodox economist Georgescu-Roegen: “Lest this position is misinterpreted again by some casual reader, let me repeat that my point is not that arithmetization of science is undesirable. Whenever arithmetization can be worked out, its merits are above all words of praise. My point is that wholesale arithmetization is impossible, that there is valid knowledge even without arithmetization, and that mock arithmetization is dangerous if peddled as genuine.” (1971, p. 15)

There are heterodox AND orthodox economists who cannot get their heads around this still valid summary. These are the retarded folks who do not understand that there is an essential difference between science and non-science. The former is the realm where the criterion true/false applies and NOTHING else (= theoretical economics), the latter is the vast realm of storytelling where anything goes (= political economics). So there are TWO kinds of Orthodoxy and TWO kinds Heterodoxy which have to be kept apart. For an overview of current economics see (2016b) plus description (2016a).

True/false in turn has TWO inseparable aspects: “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, p. 31)

Logical consistency is methodologically secured by the axiomatic-deductive method. This method presupposes firm ground to start with or, as Aristotle put it: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”

The fact of the matter is that BOTH orthodox microfoundations and heterodox macrofoundations are false. Because of this, traditional Heterodoxy is not an acceptable replacement of Orthodoxy. The current state of economics is: Walrasianism, Keynesianism, Marxianism, Austrianism is materially/formally inconsistent. Economics is a failed science. This calls for a paradigm shift.

Heterodox macro has been formalized. This is praiseworthy. The problem is that there are different versions of heterodox macro, e.g. Keynes, Kalecki, Minsky, Keen, which are INCONSISTENT. So traditional macrofounded Heterodoxy is formal garbage (2015) (2016c) just as microfounded Orthodoxy. Because there cannot be a pluralism of false theories BOTH approaches have to be replaced by the correct macrofoundations. Nothing less will do. Inconsistency is lethal in science. Game over for Orthodoxy and traditional Heterodoxy.

Egmont Kakarot-Handtke

References
E.K-H (2015). Heterodoxy, too, is scientific junk. Blog post. URL
E.K-H (2016a). From Orthodoxy to Heterodoxy to Sysdoxy. Blog post. URL
E.K-H (2016b). From proto-science to science. Wikimedia. URL
E.K-H (2016c). Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn. Blog post. URL
Georgescu-Roegen, N. (1971). The Entropy Law and the Economic Process. Cambridge, MA:
Cambridge University Press.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

***
COMMENT on Barkley Rosser on Aug 22

Georgescu-Roegen said: “What particular reality is described by a given theory can be ascertained only from that theory’s axiomatic foundation.” (1966, p. 361)

And: “In fact, the history of every science, including that of economics, teaches us that the elementary is the hotbed of the errors that count most.” (1970, p. 9)

Georgescu-Roegen was well aware that the axiomatic foundations of economics are defective. Neither Orthodoxy nor Heterodoxy got this pivotal methodological point until this day.

Georgescu-Roegen was also well aware of his fellow economists’ utter scientific incompetence: “Knight lamented that there are many members of the economic profession who are ‘mathematicians first and economists afterwards.’ The situation since Knights time has become much worse. There are endeavors that now pass for the most desirable kind of economic contributions although they are just plain mathematical exercises, not only without any economic substance but also without mathematical value. Their authors are not something first and something else afterwards; they are neither mathematicians nor economists.” (1979, p. 317)

This is the very definition of economics as cargo cult science.* The situation since Georgescu-Roegen’s time has become even worse.

References
Georgescu-Roegen, N. (1966). Analytical Economics, chapter Economic Theory and Agrarian Economics, pages 359–397. Cambridge, MA: Harvard University Press.
Georgescu-Roegen, N. (1970). The Economics of Production. American Economic Review, Papers and Proceedings, 60(2): 1–9. URL
Georgescu-Roegen, N. (1979). Methods in Economic Science. Journal of Economic Issues, 13(2): 317–328. URL

* Wikipedia

***
COMMENT on Frances Coppola on Aug 22

Your argument is entirely beside the point because ‘Science does NOT predict the future’.

***
REPLY to Barkley Rosser on Aug 23

You write: “First of all, lots of economists, even including some fairly mainstream ones, are aware that a lot of the axioms of economics are flawed.”

Famously, Keynes was very aware of this 80 years ago. “The classical theorists resemble Euclidean geometers in a non-Euclidean world ...” (1973, p. 16). And he knew that the fault was in what today is called microfoundations: “For if orthodox economics is at fault, the error is to be found not in the superstructure, ... but ... in the premises. (1973, p. xxi)

Consequently, Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

These formal foundations are conceptually and logically defective because Keynes never came to grips with profit and therefore “discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12).

This was how Heterodoxy started in earnest. The original task of Heterodoxy is NOT to criticize Orthodoxy and to improve it here and there but to REPLACE indefensible scientific garbage and to become the legitimate Orthodoxy. As we know today, Heterodoxy messed up the necessary paradigm shift.

Keynes’s original blunder kicked off a chain reaction of errors/mistakes: (i) all I=S/IS-LM models are false since Keynes and Hicks, (ii) Keynes’s profit conundrum has not been solved by After-Keynesians, (iii) employment and monetary theory is still false.

On the other hand, Orthodoxy went on with their flawed ‘euclidean’ axioms. As Krugman nicely put it “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

This is the current state of economics: the orthodox microfoundations are flawed since 140 years and the heterodox macrofoundations are flawed since 80 years. As a consequence, all models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and together this is roughly 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks. Economic policy guidance has NO sound scientific foundation but is plucked from thin air.

From this follows, firstly, that the word ‘sciences’ has to be eliminated from the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. The general public has to be informed that the 200 year old claim and the actual state of economics do not match. It follows, secondly, that incompetent scientists have to be expelled from economics regardless of their affiliation to either Walrasianism, Keynesianism, Marxianism, Austrianism or any other failed approach. It follows, thirdly, that the pathetic cargo cult ping-pong between brain-dead Orthodoxy and silly Heterodoxy ends: “So we really ought to look into theories that don’t work, and science that isn’t science.” (Feynman)

And this is what one REALLY sees: The orthodox microfoundations are flawed. The heterodox macrofoundations are flawed. Economics is a failed science. Economists are incompetent scientists.


References
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

Failed institutions

Comment on jlegge and Robert Locke on ‘Trade, Truth and Trump’

Blog-Reference

The monetary order and banking are institutions that evolved historically. Like in biological evolution the outcome of this messy process is often sub-optimal. Institutions can and must be carefully designed and constructed. The U.S. is particularly bad at institution building.

Mortgage financing, for example, is a very old and rather simple business. In Germany it was institutionalized in 1900 with the Mortgage Banking Act. This law was so well-crafted that it worked with minor modifications until 2005 when deregulation became the hype of the day.

The core of the risk-minimizing regulation had been that a mortgage bank can finance at most 60 percent of the carefully assessed long term value of a house (without imputed speculative gains). As a result, there has never been a real estate boom-bust cycle in Germany since 1900. That is quite remarkable when one considers that Japan, the U.S., UK, Spain and many other economies have been badly devastated by real estate busts.

Interim results: (i) financial crises are the result of a bad institutional design, (ii) the U.S. is particularly untalented at institution building, (iii) in the international arena, according to a variant of Gresham’s Law, bad institutions crowd good institutions out. This is the most detrimental side-effect of globalization.

What holds for banking holds for other institutions. First and foremost for the relations between business and labor. The legal status of unions has always been precarious in the U.S.

With regard to trade one has to keep in mind that the beneficial effects have been theoretically derived since Ricardo under the condition of equilibrium. So, the often lamented negative effects for the American workforce do not necessarily come from trade per se but from the balance of trade DEFICITS of the U.S.

Dean Baker concludes: “Donald Trump is a hateful bigot, but that doesn’t mean that everything he says is wrong. It would be a huge step forward if his critics could acknowledge that the recent pattern of trade has been harmful to large segments of the population.”

On closer examination the harm to the U.S. population stems ultimately from the rather shaky micro and macro institutional setup. This, though, is alone the POLITICAL business of the American people and their future president. Politics in turn is NOT the proper business of economics understood as a science.

What Mr. Trump says about trade or any other economic issue is neither true nor false but simply irrelevant because we can be sure that he does not understand how the economy works. This sad fate he shares with orthodox and heterodox economists.

Egmont Kakarot-Handtke

***
COMMENT on Ken Zimmerman, William Neil, Robert Locke on Aug 22

There is politics and there is economics. If the American people elects a president who is committed to Neoliberalism then this is their internal affair.

Economics is a science which tries to find out how the market economy works. At present economics is a failed science. As far as Neoliberalism is based on economic theory it has NO sound scientific foundation. This holds across the board for Walrasianism, Keynesianism, Marxianism, and Austrianism which are all PROVABLE inconsistent.

So the whole discussion about economic policy hangs squarely in midair. Economists simply do not know how the market economy works.*

The failure of traditional Heterodoxy consists in never rising above the level of baseless and pointless politicizing. The proper task of Heterodoxy is to replace Orthodoxy and to make economics a science. It is NOT the task of Heterodoxy to comment on Mr. Trump’s or Mrs. Clinton’s utterances about the economy. This has been done much better by comedians.

* For details see here and here.

***
REPLY to Robert Locke on Aug 23

There is politics and there is economics. If the American people elects a president who is committed to Neoliberalism then this is their internal affair. If the German people elects politicians who implement co-determination then this is their internal affair. If the UK people votes for Brexit then this is their internal affair. NO economist has to comment on this. In the political sphere the economist can participate just like every other citizen but NOT as economist. A comment on Mr. Trump’s or Mrs. Clinton's policy is a political statement but not economics.

An economist is committed to scientific standards alone and his subject matter is the economy and nothing else. From history we know that science and politics do NOT mix. Science has never bettered politics but politics has always corrupted science. So both spheres have to be kept strictly apart.

All this is clear since J. S. Mill: “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.”

Political economics has not produced anything of scientific value in the last 200 years. Science has nothing to do with opinion but solely with knowledge. Scientific knowledge takes the form of a consistent theory. At the moment neither Orthodoxy nor Heterodoxy has to offer anything in the way of a consistent theory ― only storytelling and agenda pushing.

***
REPLY to William Neil on Aug 23

You ask: “Are you familiar with L. Randall Wray’s book, ‘Modern Monetary Theory,’ which is, in my view, an attempt to do what you say has not been done: advance a heterodox theory, internally consistent.”

Yes. I commented on Wray’s approach on several occasions.*

You say: “... if Neoliberalism is right, then both Great Britain, at the end of the Napoleonic wars in 1815-1830, and the U.S. at the end of WWII, should have been in deep economic trouble based on the size of their national debts in relation to GDP.”

These concerns 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)

What is not well understood since Adam Smith is the relationship between growing private/public debt and monetary profit for the economy as a whole (2014). The correct profit equation reads: Qm = Yd+I-Sm. Legend: Qm: monetary profit, Yd: distributed profit, Sm: monetary saving, I: investment expenditure. The profit equation gets a bit more complex when foreign trade and government is included.

Roughly speaking, what happens in the monetary economy is this: the profit of the business sector as a WHOLE does NOT depend on productivity or low wages or the greed of capitalists or the smartness of managers or the degree of monopoly but on the growth of the household sector’s (public sector’s) debt. Therefore, as long as this private (public) debt grows employment and profit is fine. Needless to add that this implies the existence of a banking sector with the capacity of credit/money creation. Things become worrisome, though, as soon as the credit expansion stops and nasty as soon as the household sector (public sector) as a whole pays the debt back. In this case profit turns into loss and the business sector breaks down (2014). Note well, this happens without any debt crisis or market failure or wrongdoing of the banking sector. It SUFFICES that the private (public) households eventually pay back their debt as they are supposed to do. This is because growing/shrinking household sector (public sector) debt immediately translates into profit/loss of the business sector. Economists cannot see this because standard price and profit theory is false since Adam Smith.

The size of debt is of secondary importance. Of primary importance is whether (the sum of private and public sector) debt grows or shrinks ― the first derivative of debt, so to speak. The debt/GDP ratio is a misleading indicator.


References
Halévy, E. (1960). The Growth of Philosophic Radicalism. Boston, MA: Beacon Press.
Kakarot-Handtke, E. (2014a). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741:
1–23. URL

* Please go to the AXEC blogspot and enter Wray in the search field. See also the references to working papers

***
REPLY to William Neil

You say: “It was pre-credit card, although there was a growing segment of long time purchases of consumer capital goods…but I never see that debt cited as a major contributing factor…more the speculative frenzy on stocks as the chief form of ‘indebtedness’, ...”

The outer form of debt is secondary. If the household sector as a WHOLE gets 100 monetary units per period as wage income and spends 110 units this is dissaving -S and increases the household sector’s debt. This involves creating money out of nothing. However, whether the increase of debt takes the form of overdrafts or credit card debt or whatever concrete historical form is secondary. It is -S where the positive effect on employment comes from.

When speculators buy stocks on credit this is an entirely DIFFERENT matter which has NO immediate effect on employment (2011).

In very rough terms the Great Depression had three interlocking and self-reinforcing causes: (0) Trigger: stock market crash, which weakened the banking sector, (i) debt deflation as described by Koo (2016d; 2016c), (ii) shortfall of aggregate demand as described by Keynes, (iii) falling profits, FALLING wages (2016b).

The Great Depression is the empirical proof that the market economy is NOT self-correcting (2016a). In other words it is a REFUTATION of equilibrium theory or Orthodoxy as a WHOLE.

In a nutshell, this is what formally/materially consistent economics (= theoretical economics = science) tells you. Political economics in the incarnation of Friedman tells you that it was all the fault of the FED and Bernanke gladly repeats it (2000).

As for every economist your first decision is to do (a) theoretical economics (= science), or (b), political economics (= agenda pushing). In case (b) you will forever burn in scientific hell. It is as simple as that.


References
Bernanke, B. S. (2000). Essays on the Great Depression. Princeton, NJ: Princeton University Press.
E.K-H (2016a). Could we, please, all focus on the key question of economics? Blog post. URL
E.K-H (2016b). Demystifying employment theory and policy. Blog post. URL
E.K-H (2016c). The other half plus the hitherto missing true foundations of macroeconomics. Blog post. URL
E.K-H (2016d). There is no thrift paradox, or, How economists fell over their own feet. Blog post. URL
Kakarot-Handtke, E. (2011). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL

***
REPLY to Robert Locke on Aug 25

You say: “Keynes gave ONE explanation for it; others long before him gave explanations. Marx. for example, List, for another, Hobson, Lenin for two more, etc.”

In economics, almost everything and the exact opposite has already been said sometime, somewhere, by somebody.

The problem is more than 2000 years old and Parmenides solved it: “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)

Science is the way to figure out what is mere opinion = doxa and what is genuine knowledge = episteme. Knowledge is what is materially/formally consistent and this has to be established by PROOF. Blah-blah and opinion count for nothing.

Keynes understood this. In the 1934 BBC radio address he tried to answer the central question of economics: “Is the Economic System Self-Adjusting?” Obviously, this is the fundamental question for economic policy because it defines the roles of business/state.

Now, this is the situation. General equilibrium theory delivered the formal proof that an equilibrium exists. This proof is for several reasons not acceptable as we know by now.

What is still lacking since Keynes is the PROOF that the monetary economy is NOT self-adjusting.* All else is opinion and of opinion we have more than enough.

Heterodoxy has to become serious and to move from political economics (= blah-blah, plausible myth, agenda pushing) to theoretical economics (= science).

* See ‘What Keynes really meant but could not really prove

***
REPLY to Robert Locke, Ken Zimmerman, Dave Taylor, etcetera on Aug 26

Cheap talk is the core problem of economics since 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)

This is how economics became the honeypot for morons, populists, incompetent scientists, and agenda pushers. In principle, there is nothing wrong with this, of course ― these folks, too, need a forum for the exchange of their ideas and an opportunity to politicize and to gossip and to hype their friends and to mob their foes.

The problem arises with the claim that economics is a science which is as old as Adam Smith/Karl Marx. Because Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLE false this claim is either a self-delusion or a fraud.

For every intelligent person it is crystal clear that economics is a failed science. The two main tasks at this critical juncture are (i) positive, i.e. to promote the necessary paradigm shift, and (ii) negative, i.e. to get rid of the proto-scientific dung of the past 200 years. The latter task compares to the Fifth Labor of Heracles and is therefore called Project Augean Stable: “[Augeas] is best known for his stables, which housed the single greatest number of cattle in the country and had never been cleaned, until the time of the great hero Heracles.”* This is a fitting metaphor of current economics.

Project Augean Stable starts with a clear separation of political economics (= storytelling, agenda pushing) and theoretical economics (= science). The mission of Heterodoxy is to flush the heap of proto-scientific dung out and to make economics a science. Clearly, this cannot be done by gossiping about Mr. Trump or any other freak phenomenon of Circus Maximus.

Politics is currently trumped to absolute zero. Economics is a trumped science since Adam Smith. Heterodoxy is here to change the latter but not to cheap talk about the former.

The current situation of economics is summarized in this exhibit.

The key point is that there is political economics and theoretical economics and ALL political economics is proto-scientific dung. The distinction Orthdoxy/Heterodoxy does NOT stand for right-wing/left-wing but for cargo-cult/science. This translates into the Augean Project: to flush the cheap talkers of ALL colors/schools.**

* Wikipedia
** See also 'Nothing to choose between Orthodoxy and traditional Heterodoxy' and 'Enough! Economists, retire now!'

***
REPLY to Robert Locke, Ken Zimmerman, Dave Taylor, gracchibros et al. on Aug 27

Trumpism has become a widespread nuisance. It consists in nonsense maximization = sense minimization under the constraint of 140 characters. Economists are traditionally good at this discipline and they hold the record with zero sense for a standard peer-reviewed DSGE/I=S/IS-LM paper but they regularly need more than 140 characters for the demonstration.

Economists in general and heterodox economists in particular dabble in:
― economic history (William Neil et al.)
― history of scientific thought (Asad Zaman et al.)
― psychology (Ken Zimmerman et al.)
― sociology/Frankfurt School (graccibros et al.)
― philosophy/religion/literature (Dave Taylor et al.)
― political science (gracchibros et al.)
― ethics (mariaalejandramadi et al.).

All this is very, very interesting but OUT of economics. Isn’t it time for the jacks of all trades to do a little economics? Theory of employment? Theory of profit? What about a consistent and comprehensive explanation of how the economic system works which beats general equilibrium theory hands down?

Please notice: Heterodoxy and Trumpism do not mix. Never ever. Who cannot answer the question about the difference between income and profit is out of economics. Recall, you are not admitted to physics if you cannot tell the difference between potential and kinetic energy. Science is hard, this holds also for economics. But in politics they are happy about every Trumpy. Think about it.

Immediately folloing: 'Turning the bananatization of economics around'

August 20, 2016

Economics: A map for the perplexed

Comment on Matias Vernengo on ‘Noah Smith on heterodox models’

Blog-Reference and Blog-Reference on Aug 21 adapted to context

Noah Smith asserts: “So heterodox economics hasn’t really produced a replacement for mainstream macro.” This is true for traditional Heterodoxy but not for constructive Heterodoxy.

The whole truth is that Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLE false, i.e. materially and formally inconsistent. It is not just about Orthodoxy and Heterodoxy.

For a stylized map of current economics see Wikimedia. See also post ‘From Orthodoxy to Heterodoxy to Sysdoxy’ and cross references Paradigm shift.

Egmont Kakarot-Handtke

August 18, 2016

Science does NOT predict the future

Comment on Lars Syll on ‘On the irrelevance of Milton Friedman’

Blog-Reference and Blog-Reference on Aug 19

The representative economist has no idea of what science is all about. First of all, science does NOT ‘predict the future’ simply 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 occupation of prophets, fear mongers, astrologers, psychics, poultry entrails readers, sensationalists, half-witted journalists, etcetera. In marked contrast, science is about invariants or eternal laws.

So, scientists do not predict when the next apple will fall from the tree. What they indeed predict is position and velocity at any point in time once the apple has started to fall. The commonsenser’s view of reality is entirely DIFFERENT from the scientist’s view. The commonsenser’s view is practical, trivial, and false but utterly convincing for other commonsensers. This is why false world views/theories that have no immediate grave negative practical consequences can survive for an indefinite time.

Each falling apple is an unique historical event. There are arbitrary many proximate causes for an apple to fall: a hailstorm, playing children, an exploding meteorite, material fatigue, an earthquake, and so on. In almost all cases the singular event is uncertain and unpredictable. That is so OBVIOUS that no physicist ever lost many words about the historicity and uncertainty of falling apples. Not more can be reiterated about uncertainty than five words: “We simply do not know.” (Keynes)

A SCIENTIFIC prediction is a conditional proposition which presupposes: (i) the exact knowledge of initial conditions, (ii) the knowledge of one or more universal laws, (iii) the absence of disturbances. (Popper, 1994)

Where do we get the universal laws from? They follow from a mental construct called theory. A theory in turn must satisfy TWO criteria: material consistency and formal consistency (Klant, 1994). The former is established by observation/testing the latter by the axiomatic-deductive method, which in turn only works when the axioms/premises are true or as Aristotle said: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”*

Now it is pretty obvious that the behavioral premises/axioms of economics (agents individually optimize subject to constraints; agents have full relevant knowledge etcetera) are NOT certain, true, and primary. And this means that the whole analytical superstructure of orthodox economics is false, even if each intermediate logical step is correct.

Neither Friedman nor Samuelson nor the rest of the scientifically incompetent orthodox and heterodox crowd got this elementary methodological point. And this is why Walrasianism, Keynesianism, Marxianism, and Austrianism are provable false. The common underlying error of these approaches consists of the naive commonsensical belief that economics is a social science. This quite naturally leads to the acceptance of silly assumptions about human nature/behavior/action as premises/axioms.

Egmont Kakarot-Handtke

* For more details see exhibit on Wikimedia


Related 'Economics is NOT a social science' and 'How to get rid of an obsolete theory' and 'ICYMI Prediction/Forecasting' and 'True macrofoundations: the reset of economics'

***
COMMENT on Thornton Hall on Aug 19

You quote Hume: “... but when the road ends at a coal-pit, he [the traveler] doesn’t need much judgment to know that he has gone wrong, and perhaps to find out what has led him astray.” And conclude: “Syll, et al, choose to debate the size, scope, and shape of the coal pit.”

This, though, misses the crucial point: “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)

Economists know quite well that they are in the coal pit. The point is that they have no clue how to get out. So Orthodoxy and Heterodoxy entertain the public with the grand coal-pit-wrestling-in-the-dark sitcom.

What is needed is the “progressive alternative”, i.e. a new paradigm. Indeed, the failure of traditional Heterodoxy consists in endlessly debating the “size, scope, and shape of the coal pit” or, as Feyerabend put it: “... 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. (2004, p. 72)

The real task, then, is to define the new foundations of a materially and formally consistent economic paradigm. This, obviously, is beyond the means of the adherents of both Orthodoxy and traditional Heterodoxy.* These folks will end their wasted scientific lives in the coal pit.

References
Feyerabend, P. K. (2004). Problems of Empiricism. Cambridge: Cambridge University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See ‘From Orthodoxy to Heterodoxy to Sysdoxy’and ‘How to get rid of an obsolete theory’ and cross references Paradigm shift and 'Prediction does not work? Try retrodiction first' and 'What is dead certain in an uncertain world: economists’ abysmal incompetence'

August 17, 2016

How to get rid of an obsolete theory

Comment on Raphaële Chappe on ‘General Equilibrium Theory: Sound and Fury, Signifying Nothing?’

Blog-Reference

Orthodoxy has failed on all counts and has no future. This is the point of departure of all new economic thinking. The ultimate reason of failure is the proven scientific incompetence of economists since Adam Smith.

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”.

Because every theory is defined by its foundational premises, a.k.a. axioms, there is, as a matter of principle, no need to refute every single proposition of the elaborated theoretical superstructure, it suffices to ‘throw over’ (Keynes) the axioms. Yet, this is not enough. The negative/destructive first step must be followed by a positive/constructive second step. As Blaug put it: “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.” (1998, p. 703)

First step: economists have to throw over the orthodox set of axioms which is defined by these six hard core propositions:

HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub, 1985, p. 109)

The methodological blunder that suffices to make this axiom set unacceptable is that HC3 and HC5 introduce nonentities and that HC6 is a petitio principii.

Note that we follow here Keynes’s methodological insight as laid down in the General Theory: “The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ― as the only remedy for the unfortunate collisions which are occurring. 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)

In other words, the methodological revolution in economics consists in the switch from behavior-centered bottom-up, i.e. subjective microfoundations, to structure-centered top-down, i.e. objective macrofoundations.

Accordingly, Keynes went on to define the new set of foundational propositions: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (1973, p. 63)

Unfortunately, at this critical juncture an error slipped in because Keynes did not come to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al., 2010, p. 12)

Because of this, Keynes’s two foundational macroeconomic equations (Y=C+I, S=Y-C) have to be replaced. The most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm and is given by these three objective structural axioms:

A1. Yw=WL wage income Yw is equal to wage rate W times working hours L,
A2. O=RL output O is equal to productivity R times working hours L,
A3. C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The investment good sector comes in at a later stage. So, what we have with A1 to A3 is the pure consumption economy as the most elementary economic structure. This structure is the core of what Keynes called the monetary theory of production and it fully replaces the silly real exchange models.

After-Keynesians either got stuck at I=S/IS-LM-models which are provable false (2011) or fell back to maximization-and-equilibrium, i.e. HC1 to HC6, or both as in the case of the maximal confused Krugman (2014).

Human behavior, tastes, choice, or society have no durable underlying structure but the monetary economy has and this systemic structure is given in the most elementary case by A1 to A3. Economics is NOT a behavioral or social science but a system science. A system can be unambiguously defined. This is the indispensable condition to do science. The alternative to science is storytelling. This is what Walrasians, Keynesians, Marxians, and Austrians are actually doing.

Keynes started the paradigm shift from micro to macro. However, he got stuck with the definition of overall profit. Not to know what profit is turns out to be fatal for every economist and every approach. This methodological deadlock is overcome with the consistent axiomatic set A1 to A3 which provides the formally and materially consistent economic theory.* Thus Sysdoxy replaces both Orthodoxy and Heterodoxy.

Raphaële Chappe concludes: “When a way of thinking limits our thinking then it’s time, with due appreciation for those who built it, to ‘throw away the ladder’.” This, though, misses the crucial point: “There is no evidence to suggest that economists abandon degenerating programs in the absence of a progressive alternative.” (Weintraub, 1985, p. 148)

The real task, then, is to define the foundations of a materially and formally consistent economic paradigm. This is beyond the means of the adherents of both Orthodoxy and traditional Heterodoxy.

Egmont Kakarot-Handtke


References
Blaug, M. (1998). Economic Theory in Retrospect. Cambridge: Cambridge University Press, 5th edition.
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
Weintraub, E. R. (1985a). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.
Weintraub, E. R. (1985b). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

* See cross references Paradigm shift

ICYMI/Orthodoxy/Heterodoxy/Sysdoxy

Comment on Noah Smith on ‘Economics Without Math Is Trendy, But It Doesn’t Add Up’

Blog-Reference and Blog-Reference and Blog-Reference adapted to context

Noah Smith asserts: “So heterodox economics hasn’t really produced a replacement for mainstream macro.” This is true for traditional Heterodoxy but not for Constructive Heterodoxy.

See ‘From Orthodoxy to Heterodoxy to Sysdoxy’ and cross references Paradigm shift.

Egmont Kakarot-Handtke

Related 'ICYMI/Heterodoxy'

August 16, 2016

ICYMI/Heterodoxy

Comment on Noah Smith on ‘Economics Without Math Is Trendy, But It Doesn’t Add Up’

Blog-Reference and Blog-Reference adapted to context

Noah Smith is only partly correct. The whole truth is that Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLE false, i.e. materially and formally inconsistent. It is not just about Orthodoxy and Heterodoxy. The ultimate reason for the all-round failure is the scientific incompetence of economists (including Noah Smith, of course).

For more details about the actual state see ‘The scientific self-elimination of Heterodoxy’ and cross references.

Egmont Kakarot-Handtke

Related 'ICYMI/Orthodoxy/Heterodoxy/Sysdoxy'

Economics and Project Augean Stable

Comment on Barkley Rosser on ‘The Man Who Saved The World From Nuclear Holocaust During The Cold War’

Blog-Reference

For every intelligent person it is crystal clear that economics is a failed science. The two main tasks at this critical juncture are (i) positive, i.e. to promote the necessary paradigm shift, and (ii) negative, i.e. to get rid of the proto-scientific dung of the past 200 years. The latter task compares to the Fifth Labor of Heracles and is therefore called Project Augean Stable: “[Augeas] is best known for his stables, which housed the single greatest number of cattle in the country and had never been cleaned, until the time of the great hero Heracles.”*

The problem with Barkley Rosser is that he neither contributes to (i) nor to (ii) but steadfastly continues to produce dung.

Since Smith and Marx economics claims to be a science. And this claim is officially enshrined in the title: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

Economics started as Political Economy. Political Economy is agenda pushing and economists from Smith, Ricardo, Marx, Keynes, Hayek, Samuelson to the present were agenda pushers first and scientists second. As a matter of fact, they were lousy scientists because they never figured out how the monetary economy works. How do we know this? We know this for sure because the profit theory is "still elusive" as every economics student knows from the Palgrave (Desai, 2008).

Let this sink in: until this day economists have no idea about what profit is. This means that they have no idea how the market economy works. This in turn means, that their policy guidance is not only scientifically worthless but possibly harmful if applied. This in turn means that economists bear the intellectual responsibility for the social devastations of unemployment, depression etcetera. With their proven scientific incompetence economists are a menace to their fellow citizens.

Project Augean Stable starts with a clear separation of political economics (= agenda pushing) and theoretical economics (= science). The project proceeds with flushing out all proto-scientific dung and expelling all political economists.

I had no idea who Schelling was until I read Barkley Rosser’s posts. In his last piece he said: ... Schelling never wrote about or cared about profit rates or how profit and income are defined”. Looking up Wikipedia I learned that Schelling got the economics Nobel Prize.

Questions: (i) how can it be that an economist who does not know what profit is and who does not care to define the pivotal phenomenon of his discipline is awarded a prize for “economics sciences”, and (ii), why is Barkley Rosser hell-bent to sell an annoying political busybody who has failed in his own discipline as brilliant military/strategical thinker, and (iii), why is Barkley Rosser abusing an economics blog for propagating his silly version of the history of the Cold War, and (iv), why has Barkley Rosser not realized until this day that in the Cold War scientists were either abused or volunteered as useful idiots or fig leaves and that they NEVER were in any position to “save the world”?

Augean Project’s answers: Cold War gossip/storytelling out of economics ― flush. Abolition of the the economics Nobel Prize ― flush. Expulsion of economists who cannot tell what profit is from the scientific community ― flush. Expulsion of all political agenda pushers from the sciences ― flush. Retiring Barkley Rosser from EconoSpeak ― flush.

Egmont Kakarot-Handtke

* Wikipedia

Preceding 'Economics: Science or cheap talk?' and 'Samuelson or Who is the smartest smartie?'

Related 'A heap of scientific rubbish'

***

REPLY to Barkley Rosser on Aug 17

(i) You say: “I should not waste my or other readers of this blog’s time, ...” For once, I agree with you.

(ii) I said “I had no idea who Schelling was until I read Barkley Rosser’s posts.” So, when I asked “why is Barkley Rosser hell-bent to sell an annoying political busybody” I paraphrased his own characterization “Schelling pushed tirelessly in numerous channels, most of them private but highly placed, ...” from the perspective of those highly placed.

(iii) The whole story is surreal. Tell a highly ranked military that Schelling saved the world in the Cold War and he will laugh three days and then drop dead of apoplexy. Einstein was very well aware that for the scientists the game was over before it began: “When a reluctant Albert Einstein wrote the letter to President Roosevelt that set the American atomic bomb project in motion, he ruefully predicted to his colleagues: ‘You realize, once the military have this, they will use it, no matter what you say.’”*

(iv) Not knowing more of Schelling than Barkley Rosser posted here, I am pretty sure that Schelling knew all this, too. After all, he was more brilliant than the brilliant but arrogant von Neumann and the brilliant but inferiority-complexed Samuelson and the brilliant equilibrist Arrow taken together. So, yes, it is probably Barkley Rosser who is the busybody here. I am pretty sure that Schelling, now age 95, is rather annoyed of being paraded as world saver before politically retarded economics students by the storyteller, namedropping sitcom economist and time waster Barkley Rosser.

* Source

August 14, 2016

Economics: Science or cheap talk?

Comment on Barkley Rosser on ‘The Man Who Saved The World From Nuclear Holocaust During The Cold War’

Blog-Reference

In his followup post Barkley Rosser says: “Staying within the game theory framework that Schelling operated within, the problem we face now is ‘cheap talk.’ This term entered formal game theory discussions in a paper in 1982 ...”*

Cheap talk is the core problem of economics since 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)

This is how economics became the honeypot for morons, populists, incompetent scientists, and agenda pushers.

With respect to scientific content not much changed from the founding fathers to Samuelson. His textbook has ― with a probability close to 1 ― the lowermost scientific content of all textbooks ever written. It is as inconsistent as you can get. Worse, Samuelson, like all his fellow economists, had no idea of what profit is. Every intelligent person can check this out by browsing through the textbooks from Samuelson to Mankiw (2015). The core problem of economics is that there is no such thing as an intelligent economist. No intelligent person has ever accepted nor will ever accept Samuelson’s pure unadulterated cheap talk as science. It is just the other way round: the acceptance of this garbage is apodictic PROOF of scientific incompetence.**

Not scientific quality, but something else had changed since the founding fathers and this was the introduction of the economics Nobel Prize. The fact that Samuelson’s proto-science stuff was officially declared as science is, if anything, a sure indicator of the abysmal incompetence of the Prize committee.

The introduction of an economics Nobel Prize sorta-kinda marked a watershed. Yet it is NOT that economics moved finally from cheap talk proto-science to science; instead economics moved from cheap talk proto-science directly to sitcom entertainment. This means in concrete terms that economics became subject to The First Law of the Entertainment Industry which says: Turn every issue between birth and death (and if possible pre-birth and after-death) into a personality show.

The wording of Barkley Rosser’s gossip post provides a fine example: “... most intelligent person he ever met, ... generally viewed as by far the most respected living economist, ... coauthor of the most famous and influential paper, ... but Samuelson thought Schelling was ultimately smarter than either of them, ... after all, he got his Nobel in game theory, ... which was by all accounts on the bedside table of JFK, ... Schelling, a technical adviser on the 1964 film, ‘Dr. Strangelove’, ... [he] pushed tirelessly in numerous channels, most of them private but highly placed, ... ‘many [very well informed] people’ say he was more responsible than anybody else for why there was no nuclear war during the Cold War.” (See intro)

Science, to recall, is simply about true/false and NOTHING else. So, let us return from JFK’s bedside and the cheap talk of “very well informed people” back to reality. Barkley Rosser is an incompetent economist. Proof: he has not realized until this day that economics textbooks are manifest scientific garbage since Samuelson’s firstling of 1947.

What on earth drives Barkley Rosser to pester the EconoSpeak blog with his even more incompetent cheap talk about the Cold War? What we know for sure about this period is (i) that it has been a mixture of top secret and heavy disinformation from start to finish, (ii) that historians have NO consensus until this day about what was real and what was hoax, (iii) that physics has been hijacked by politics to a degree never seen in history before, (iv) that scientists failed to prevent or even supported the weaponizing of science.

Barkley Rosser’s Cold War gossip confirms what we already know; science in general and physics and economics in particular has to get out of politics and to distance itself to the highest possible degree from political agenda pushers of all colors. Politics and science do not mix. More, their mixing is a sure recipe for scientific failure as everybody can see with naked eyes: political economics has not produced anything of scientific value in more than 200 years ― it has all been cheap talk.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). How the Intelligent Non-Economist Can Refute Every Economist Hands Down. SSRN Working Paper Series, 2705395: 1–6. URL
Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.

* See post
** “It was lucky for me that one of my undergraduate texts referred to Paul Samuelson’s Foundations of Economic Analysis as ‘the most important book in economics since the war.”’ (Lucas)

Preceding 'Samuelson or Who is the smartest smartie?'.
Following 'Economics and Project Augean Stable'.

August 13, 2016

Samuelson or Who is the smartest smartie?

Comment on Barkley Rosser on ‘The Man Who Saved The World From Nuclear Holocaust During The Cold War’

Blog-Reference

Who needs an overdose of soft soap? Here it is: “That would be Thomas C. Schelling, now age 95, whom the late Paul Samuelson once stated that Tom was the most intelligent person he ever met, presumably beating out John von Neumann, whom Samuelson argued with about cigars and general equilibrium theory, and his relative by marriage, Kenneth Arrow, a few months younger than Schelling, who is generally viewed as by far the most respected living economist, and who was a coauthor of the most famous and influential paper on the conditions for the existence of general equilibrium. But Samuelson thought Schelling was ultimately smarter than either of them.” (See intro)

The problem with Samuelson has always been that he talked about things he definitively did not understand. These were economics, politics, and intelligence.

Let us put some things straight.
(i) There is Orthodoxy with microfoundations and it has been nicely defined by Krugman: “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”#1

(ii) Methodologically, these premises are forever unacceptable.#2 A smart person realizes this at first glance. Samuelson did not realize anything.

(iii) There is Keynesianism with macrofoundations.#3

(iv) These formal foundations are conceptually and logically defective because Keynes never came to grips with profit. Methodologically, Keynes’s premises are forever unacceptable. A smart person realizes this at first glance. Samuelson did not realize anything.

(v) In Samuelson’s synthesis the defective Walrasian micro axioms and Keynes’s defective macro axioms were cobbled together. Samuelson’s textbook consisted of two well-balanced halves: micro and macro. Needless to emphasize that both halves do not logically fit together.

Science is committed to material and formal consistency. Samuelson’s textbook has ― with a probability close to 1 ― the lowermost scientific content of all textbooks ever written. Supply-demand-equilibrium will forever stand out as the silliest model in the history of sciences. Samuelson’s textbook is an intelligence test and economics students and other textbook writers flunk it since more than 50 years.

(vi) Economic policy proposals NEVER had sound theoretical foundations. Whatever economists in general or Samuelson in particular have argued for or against the market economy is scientifically worthless storytelling. General equilibrium theory is the epitome of a collective intellectual aberration. Economists have no scientific legitimacy in their own domain and by implication none at all in the wider political realm. Having disqualified themselves thoroughly, they are in NO position to assess the intelligence or smartness of people from other domains.

What could be more ridiculous than economists who cannot tell the difference between profit and income philosophizing about the history of the Cold War?

If Samuelson could pass as smart economist, one trembles to contemplate what the rest of the profession was then and is now.

Egmont Kakarot-Handtke


#1 More detailed, the starting point is given with these hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to  equilibrium states.” (Weintraub, 1985)
#2 For details and proofs see blog and working papers.
#3 Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.”

Following 'Economics: Science or cheap talk?'.

A heap of scientific rubbish

Comment on J. W. Mason on ‘There Isn’t Really a ‘Mainstream’ at All’

Blog-Reference

Since Smith and Marx economics claims to be a science. And this claim is officially enshrined in the title: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.

In fact, Walrasianism, Keynesianism, Marxianism, Austrianism is PROVABLE false, i.e. materially/formally inconsistent. When this is pointed out economics simply turns into an optical illusion: “Economics is not the study of the economy. Economics is just what economists do.” (See intro)

Economists know that what they do is NOT science: “Economics is a strange sort of discipline. The booby traps I mentioned often make it sound as it is all just a matter of opinion. That is not so. Economics is not a Science with a capital S. It lacks the experimental method as a way of testing hypotheses. . . . There are always differences of opinion at the cutting edge of a science, . . . . But they last longer in economics . . . and there are reasons for that. As already mentioned, rival theories cannot be put to an experimental test. All there is to observe is history, and history does not conduct experiments: too many things are always happening at once. . . . Excuses, excuses. But the point is not to provide excuses.” (Solow, 1998, pp. x-xi)

Note well, that NONE of these arguments holds water, except for “Economics is not a Science with a capital S” which translates into the correct short variant “Economics is not a science” which in turn contradicts all claims from Adam Smith onward.

More than 2000 years ago science had been defined as episteme=knowledge in contradistinction to doxa=opinion and it was well-understood that opinion is worthless: “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)

Economists do not have the true theory. Their economic policy advice never had a sound scientific foundation. Worse, economists feel quite comfortable behind their heap of scientific rubbish: “I think there is a mix of common-sense opinions, political prejudices, conventional business practice, and pragmatic rules of thumb, supported in an ad hoc, opportunistic way by bits and pieces of economic theory. It’s not possible to knock over the whole tottering pile by pulling out a few foundational texts.”

This, though, is a gross error. All variants of Orthodoxy are built upon this set of hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 147)

Methodologically, this axiom set is false and therefore the whole analytical superstructure is false, yet the representative economist has always swallowed this junk with a straight face. It should be obvious that economics cannot be built upon green cheese behavioral assumptions and nonentities like constrained optimization and equilibrium. ALL models that contain these concepts are a priori false.

The failure of the microfoundations approach is indisputable. Keynes’s macrofoundations approach suffers from other inconsistencies. The same holds for Marxianism and Austrianism.

After more than 200 years there is proof enough that economists are incompetent scientists. From Smith, Ricardo, Marx, Keynes, Hayek, Samuelson to the present economists have not figured out how the monetary economy works. We know this for sure because the profit theory is provable false until this day, and without the correct profit theory the economist has no clue of how the market economy works (2014).

Economics is a failed science or, in Mason’s words: there isn’t really a ‘mainstream’. What we have instead is a heap of scientific rubbish and a bunch of scientifically retarded blatherers.

Egmont Kakarot-Handtke


References
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
Solow, R. M. (1998). Foreword, volume William Breit and Roger L. Ranson: The Academic Scribblers. Princeton, NJ: Princeton University Press, 3rd edition.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge, MA: MIT Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL

Related 'Economists’ full-scale retreat' and 'Economics: The chief demerit is inconsistency' and 'Feeble minds, shaky assumptions, and the inevitable failure of economics' and 'Enough! Economists, retire now!'.

August 12, 2016

Eclecticism, anything goes, and the pluralism of false theories

Comment on Simon Wren-Lewis on ‘Blanchard on DSGE’

Blog-Reference

After more than 200 years it is now obvious that economics is a failed science. Orthodox economics in general and DSGE in particular is directly comparable to Geo-centrism in physics. The only difference is that Geo-centrism is dead AND buried since about 500 years while orthodox economics is dead but the majority of economists has not realized it. Those who are vaguely aware that economics is scientifically indefensible, though, do not abandon it but switch into damage control mode. Blanchard is a case in point.

Wren-Lewis, too, is a case in point. His fallback position is this: “What is at issue is not the existence of DSGE models, but their hegemony.” (See intro)

False! DSGE always has been indefensible scientific garbage. Wren-Lewis’s damage control consists in shifting the blame on the journals: “Top journal editors’ preference for the latter [general equilibrium models] means that the former [partial equilibrium] is less highly valued.”

This is ridiculous because the hegemony of Orthodoxy is not an editorial accident but the inevitable result of every half-witted economist doing 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)

Since Adam Smith economics claims to be a science but has never risen above the level of what Feynman called cargo cult science. Science is about formal and material consistency (Klant, 1994). The outstanding characteristic of economists is that they never got this pivotal point of methodology. And these are the results.

(i) There is Orthodoxy with microfoundations and it has been nicely defined by Krugman: “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”#1

(ii) Methodologically, these premises never have been and never will be acceptable.#2

(iii) When the premises/axioms/foundational propositions are false or contain nonentities the WHOLE theory/model/superstructure is false.

(iv) Because of this, orthodox policy proposals never had sound theoretical foundations.

(v) Walrasianism, Keynesianism, Marxianism, Austrianism is materially/formally inconsistent.

(vi) Keynes started the macrofoundations research program in the General Theory formally as follows: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” These formal foundations are conceptually and logically defective because Keynes never came to grips with profit.#2

(vii) Because of this, the macrofoundations approach (including After-Keynesianism, Post Keynesianism, New Keynesianism, and all I=S/IS-LM models) has already been dead in the cradle 80 years ago.

Review of the Troops. PROVABLE false
• profit theory, since more than 200 years,
• microfoundations, since 140 years,
• macrofoundations, since 80 years.

ALL models that contain maximization-and-equilibrium or I=S/IS-LM are a priori false and this is more than 90 percent of the content of peer-reviewed economic quality journals and 100 percent of textbooks of renowned authors since 1947.

No more proof of scientific incompetence is needed. Remains only one question for the scientific community: how to get rid of the ‘throng of superfluous economists’ (J. Robinson)? Or, as Wren-Lewis put it: ... there is no way that all these academics are going to suddenly decide this research programme is a waste of time.” Of course, they cannot decide it for themselves, somebody has to expel them ― including Blanchard and Wren-Lewis ― from the scientific community. Eclecticism, anything goes, and the pluralism of false theories is NOT an option.

Egmont Kakarot-Handtke

#1 More detailed, the starting point is given with these 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). To accept these microfoundations is a reliable indicator of utter scientific incompetence.
#2 For details and proofs see blog and working papers.

August 6, 2016

Economics is NOT a social science

Comment on Lars Syll on ‘On the persistence of science-fiction economics’

Blog-Reference and Blog-Reference on Aug 9

To explain social behavior is the task of psychology, sociology, political science, and other so-called social sciences.

To explain how the actual economy works is the task of economics. Economists have failed at this task. To be more specific, orthodox AND heterodox economists have failed. After more than 200 years economists have not even figured out what profit is, that is, they do not understand the pivotal phenomenon of their subject matter. By consequence, economic policy guidance never had a sound scientific foundation.

The scientific incompetence of economists consists in the fact that it is beyond their means to realize that NO way leads from the understanding of human nature/behavior/action to the understanding of how the economic system works. What makes things worse is that there is NO understanding of human nature/behavior/action to begin with.

The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science.

“The fundamental problem, therefore, of the social science, is to find the laws according to which any state of society produces the state which succeeds it and takes it place.” (Mill, 2006, p. 912)

“What is now commonly understood by the term ‘Political Economy’ is not the science of speculative politics, but a branch of that science. It does not treat of the whole of man’s nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging of the comparative efficacy of means for obtaining that end. It predicts only such of the phenomena of the social state as take place in consequence of the pursuit of wealth.” (Mill, 1874, V.38)

“The laws of economics are to be compared with the laws of the tides, rather than with the simple and exact law of gravitation. For the actions of men are so various and uncertain, that the best statement of tendencies, which we can make in a science of human conduct, must needs be inexact and faulty. This might be urged as a reason against making any statements at all on the subject; ...” (Marshall, 1920, I.III.10)

“The foundation of political economy and, in general, of every social science, is evidently psychology. A day will come when we shall be able to deduce the laws of social science from the principles of psychology ...” (Pareto, 2014, p. 20)

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins, 1935, p. 16)

What economists do not realize is that to study human behavior ― which is essentially the second-guessing/interpretation of motives/actions of individuals/groups one knows in most cases only from hearsay ― may be interesting and revealing and satisfying but is ultimately pointless, more precisely, scientifically pointless: “Alexander Rosenberg lays great emphasis on the role of intentionality in the social sciences, for in his view this role explains the nomological failures of the social sciences and supports the view that the social sciences (in anything like their current form) can never succeed in formulating real laws of human behavior.” (Hausman, 1992, p. 326)

The social sciences cannot, for deeper methodological reasons, rise above the level storytelling. And this is exactly what Walrasianism, Keynesianism, Marxianism, and Austrianism is. Neither approach satisfies the non-negotiable criteria of science, i.e., material and formal consistency.

Economists face this option: either to be expelled from the sciences or to restart economics as a system science. This means in concrete terms to move from unacceptable behavioral microfoundations and dilettantish Keynesian macrofoundations to objective/structural/ behavior-free macrofoundations.

Economists have until this day not understood how science works: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle). This means that science cannot be built upon behavioral assumptions because there is no such thing as a ‘certain, true, and primary’ behavioral assumption. This is the ultimate reason for the failure of both orthodox and heterodox economics and the persistence of science-fiction economics.

Egmont Kakarot-Handtke


References
Hausman, D. M. (1992). The Inexact and Separate Science of Economics. Cambridge: Cambridge University Press.
Marshall, A. (1920). Principles of Economics. 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
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.
Pareto, V. (2014). Manual of Policical Economy. Oxford: Oxford University Press. URL
Robbins, L. (1935). An Essay on the Nature and Significance of Economic Science. London, Bombay, etc.: Macmillan, 2nd edition.


Related 'Economics and the social science delusion' and 'The happy end of the social science delusion' and 'The Science-of-Man fallacy' and 'How to get rid of the silly Queen' and 'Economics as fool’s paradise' and 'Disoriented and lost in folk psychology' and 'Economics between cargo cult, farce, and fraud' and 'The stupidity of Heterodoxy is the life insurance of Orthodoxy' and 'Economics is not a science, not a religion, but proto-scientific rubbish'