February 28, 2017

Modern macro moronism

Comment on David Glasner on ‘Roger Farmer’s Prosperity for All’

Blog-Reference

David Glasner summarizes: “Modern macroeconomics, of which Roger’s model is one of the more interesting examples, flatters itself by claiming to be grounded in the secure microfoundations of the Arrow-Debreu-McKenzie general equilibrium model. But the great achievement of the ADM model was to show the logical possibility of an equilibrium of the independently formulated, optimizing plans of an unlimited number of economic agents producing and trading an unlimited number of commodities over an unlimited number of time periods. To prove the mutual consistency of such a decentralized decision-making process coordinated by a system of equilibrium prices was a remarkable intellectual achievement.” (See intro)

It is misleading to depict the history of economic thought as progressive. It is definitely not: “... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower). The fact of the matter is as Hume aptly put it: “... 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.” Yet, the representative economist lacks even this little judgment.

General equilibrium theory is one of the most embarrassing failures in the history of the sciences: “At long last, it can be said that the history of general  theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin. … General  theory is simply a research program that has run into the sands.” (Blaug).

Ingrao et al. conclude: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.”#1

So, there are some economists who have realized that, in order to get out of the bottom of the coal-pit, nothing less than a paradigm shift is necessary. Roger Farmer is NOT one of them. Instead of abandoning and fully replacing the current paradigm he merely rearranges the crappy components of a crappy construct.

Roger Farmer’s version of modern macro consists of three major components:

  • The Walrasian framework which is given with this axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
    The representative economist has not realized it but methodologically these premises are forever unacceptable. It should be pretty obvious that the Walrasian axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every model that contains a nonentity is a priori false.
  • “… an investment equals saving equilibrium condition (IS curve) describing the optimal consumption/savings decision of the representative individual …”. Every I=S/IS-LM model since Keynes and Hicks is false.#2
  • “… a short-run Phillips Curve that expresses actual inflation as a function of expected future inflation and the output gap.”. Every Phillips curve since Phillips’s original is misspecified.#3
Keynes already realized that the classical microfoundations approach had led into the coal-pit and therefore switched to macrofoundations. This was, in principle, the right first step towards a paradigm shift, except for the fact that Keynes messed up the macrofoundations.#4

Economics is not only in need of a paradigm shift from false Walrasian microfoundations but also from false Keynesian macrofoundations. The whole of economics has to be put on consistent macrofoundations.

David Glasner concludes: “There are few economists better equipped than Roger Farmer to lead macroeconomics onto a new and more productive path.” What the representative economist at the bottom of the coal-pit has not understood until this very day is this: If it isn’t macro-axiomatized, it isn’t economics. Roger Farmer, that much is sure, has not understood anything, which, indeed, has always been the main qualification of the fake innovators of economics.

Egmont Kakarot-Handtke

#1 Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
#2 See ‘Getting out of IS-LM = Getting out of despair
#3 See ‘NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy
#4 See ‘How Keynes got macro wrong and Allais got it right


Related 'Walras, Keynes, Samuelson, DSGE, IS-LM ― R.I.P.' and 'Macroeconomics without Keynes' and 'The futile synthesis of neoclassical rubbish and Keynesian garbage' and 'Economics: The pathetic story of two failures' and 'Macroeconomics ― dead since Keynes' and 'Rethinking deficit spending' and 'Causa finita: the end of I=S/IS-LM' and 'Neo-Paleo-Stupidicism' and 'Heterodoxy’s biggest mistake is to repeat Orthodoxy’s biggest mistake' and 'Joan Robinson and the ‘throng of superfluous economists’ and 'I=S: Mark of the Incompetent' and 'Fundamentally flawed' and 'True macrofoundations: the reset of economics'

February 26, 2017

NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy

Comment on Simon Wren-Lewis on ‘The NAIRU: a response to critics’ and Lars Syll on ‘Simon Wren-Lewis — flimflam defender of economic orthodoxy’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference on Mar 4

The NAIRU-Phillips curve is an explicit formal description of the functioning of the macroeconomic labor market. Formal description means that one has a number of variables and their relationships which summarize the current knowledge of how the economy or some part of it works. Scientific knowledge is embodied in the true theory.

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

The two questions that arise with any description are: (i) is it conceptually/logically consistent, and (ii), is it materially consistent? The second question involves the measurability of variables, the practical problem of measurement, data gathering, and statistical methodology. From a description that is either formally inconsistent or materially inconsistent ANY economic policy conclusions can be drawn. Put the other way round, policy proposals that are not based on a materially/formally consistent theory are at the same level as sitcom blather, storytelling, or soap box agenda pushing.

Economic policy guidance that is not based on the true theory is pretty much the same as ancient Roman poultry entrails reading.

The NAIRU-Phillips curve is scientifically worthless because it is conceptually inconsistent.#1 So, any discussion about measurement problems or the economic policy implications of a NAIRU is pointless. Needless to emphasize that most of the discussion circles around these distracting side issues.

The NAIRU-Phillips curve is integral part of standard economics: “The concept of the NAIRU, or equivalently the Phillips curve, is very basic to macroeconomics. It is hard to teach about inflation, unemployment and demand management without it.”#2

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)

It should be pretty obvious that the standard axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5).

Methodologically, the neo-Walrasian axioms are forever unacceptable but scientifically incompetent economists from Jevons/Walras/Menger onward accepted them as defining the ‘language of economics’: “Accepting the concept of the NAIRU does not mean you have to agree with their judgements. But if you want to argue that they could be doing something better, you need to use the language of macroeconomics.”#2

Not at all! The neo-Walrasian language of macroeconomics is composed of NONENTITIES and this leads quite naturally to measurements problems, material inconsistency, and vacuous political blather. So Heterodoxy is right in saying that “the NAIRU has to be bashed, smashed, and trashed”.

The problem of traditional Heterodoxy is that it has nothing better to offer.#3 The standard microfoundations HC1/HC5 are false, but Keynesian macrofoundations are also false. So, both orthodox and traditional heterodox labor market theories are proto-scientific rubbish.#4 As an inevitable consequence, the whole discussion about NAIRU has degenerated to the squabble of political sects. Wren-Lewis tries in vain to deny this plain fact: “Economics is certainly not a religion, where all you have to do is choose which sect you belong to and then follow great works.“

What has to be done to get out of confused sectarian squabble is to fix the labour market theory by putting it on consistent macrofoundations.

Two factors determine macroeconomic employment: overall demand and the price mechanism, or more specifically, the actual configuration of average wage rate, price, and productivity. By consequence, economic policy is about private/public demand management AND wage/price management.

The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers.#4

Egmont Kakarot-Handtke

#1 See ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia
#2 See SWL ‘The NAIRU: a response to critics
#3 See LPS ‘Simon Wren-Lewis — flimflam defender of economic orthodoxy
#4 See ‘Mass unemployment: The joint failure of orthodox and heterodox economics

***


The fatal mistake of the discussion is to accept the NAIRU-Phillips curve (with the well-known disclaimers) and to focus on the economic policy implications with regard to the given situation in the US/UK/etc. But there is NO use to discuss policy if the underlying theory is defective.

The fact of the matter is that the Phillips curve is misspecified since Samuelson/Solow.* Because there is NO such thing as a NAIRU-Phillips curve all political discussion is vacuous.


***

REPLY to Tom Hickey on Feb 28

You say: “The relationship between employment and inflation appears to be contingent and based on a number of factors, including institutional factors, that result in dynamic conditions involving uncertainty.”

This is entirely vacuous econ-waffle. Imagine, as a contrast, a physics teacher tells his students about gravitation: “The relationship between velocity and mass appears to be contingent and based on a number of factors, including history-specific factors, that result in dynamic conditions involving uncertainty.”

It is pretty obvious that economists have NOTHING of substance to say. Why do they not simply shut up?

The elementary dependency between employment and inflation and a number of other factors is given with this objective systemic equation that is composed of MEASURABLE variables.

This equation is the economic equivalent to Galileo’s Law of Fall and thus the ultimate econ-waffle stopper.

***

REPLY to Auburn Parks on Feb 28

You say: “There is a simple reason why physics like precision and predictability is inapplicable to economics, and its because of the reasons Tom provided.”

The simple reason is scientific incompetence. For details see ‘Failed economics: The losers’ long list of lame excuses

***

REPLY to Ralph Musgrave on Feb 28

You say: “You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefore it does not have a precise value.”

You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: “NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.”* The measurement problem is a side issue.**

* See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
** See ‘NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy

***
REPLY to Auburn Parks on Feb 28

The moronic part of economists, i.e. the vast majority, maintains that economics is a social science. Time to wake up to the fact that economics is a system science.#1

Economics is NOT a science of individual/social/political behavior — this is the social science delusion — but of the behavior of the monetary economy . All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/ Darwinism, political science, social philosophy, history, etcetera) and are taken in from these by way of multi-disciplinary cooperation.#2

The economic system is subject to precise and measurable systemic laws.#3

#1 See ‘Lawson’s fundamental methodological error and the failure of Heterodoxy
#2 See ‘Economics and the social science delusion
#3 See ‘The three fundamental economic laws

***

REPLY to Noah Way on Mar 1

You say: “’Economic science’ is an oxymoron.”

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 the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics (= science) had been hijacked from the very beginning by the agenda pushers of political economics. These folks never rose above the level of vacuous econ-waffle. The whole discussion from Samuelson/Solow’s unemployment-inflation trade-off to Friedman/Phelps’s natural rate to the rational expectation NAIRU is a case in point.

The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the NAIRU discussion up to Wren-Lewis are fake scientists.*

* See also ‘Modern macro moronism

***

REPLY to Ralph Musgrave on Mar 1

It would be fine if you could first learn to read and to think and to do your economics homework.

The point at issue is the labor market theory and the remarkable fact of the matter is that economists have after 200+ years NO valid labor market theory. The proof is in the NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice without sound theoretical foundation. Scientists don’t do this.

What is known since the founding fathers about the separation of politics and science is this: “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.” (J. S. Mill)

The first point is that economists violate the separation of politics and science on a daily basis.#1 The second point is that their unwarranted advice is utter rubbish because they have NO idea how the economy works. The problem society has with economists is that it would be much better off without these clowns.

You ask me: “Why then don’t you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!”

Answer: The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians. In addition, an economist who understands how the price and profit mechanism works does not make such a silly proposal, only brain-dead political agenda pushers do.#2

What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and that economics gets finally out of what Feynman aptly called cargo cult science.#3

Economists claim since more that 200 years that they are doing science and this is celebrated each year with the ‘Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel’. Time to make this claim come true.

The only thing economist like you can actively do to contribute to the progress of economics is switching on TV and watching 24/365.

#1 See ‘Scientific suicide in the revolving door
#2 See ‘Rethinking deficit spending
#3 See ‘Economists and the destructive power of stupidity

***

REPLY to Ralph Musgrave on Mar 1

You say: “Ergo economics have a duty to give the best advice they can in the circumstances.”

The only duty of scientifically incompetent economists is to throw themselves under the bus. Economists are a menace to their fellow citizens as Napoleon already knew: “Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

Economists do NOT solve social problems they ARE a social problem.

You repeat your silly question: “So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It’s blindingly obvious.”

Yes it is blindingly obvious that deficit spending does NOT solve social problems but CREATES the social problem of an insanely unequal distribution (see the references above).

This follows from the true labor market theory which is given with the systemic employment equation.#1 “The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers.”#2

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

Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips curve is provable false. Because of this ALL economic policy conclusions drawn from it are counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment and the social devastation that comes with it.

From the fact that the NAIRU labor market theory is false follows that economists are incompetent scientists and that ALL their economic policy proposals are scientifically worthless.

#1 See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
#2 See ‘NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy


***

REPLY to Anonymous on Mar 05

For the final word on NAIRU see the comment on David Glasner’s recycling of dead but not yet buried Phillips curve stuff ‘NAIRU and economists’ lethal swampiness’.

You are certainly right in stressing that economics is not a religion: actually it is a fake science. This applies to Walrasianism, Keynesianism, Marxianism, Austrianism.


Related 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather' and 'NAIRU does not exist because equilibrium does not exist' and 'If it isn’t macro-axiomatized, it isn’t economics'

February 22, 2017

Pants kicking is over, let’s do serious economics now

Comment on Lars Syll on ‘Solow kicking Lucas and Sargent in the pants’

Blog-Reference and Blog-Reference on Feb 25

The aspiring student is not much helped with this description of economics: “wildly incorrect,” “fundamentally flawed,” “wreckage,” “failure,” “fatal,” “of no value,” “dire implications,” “failure on a grand scale,” “spectacular recent failure,” “no hope”. (See intro)

Clearly, the description is spot on and it holds for Walrasianism, Keynesianism, Marxianism, Austrianism. Everybody knows by now that economics is a failed science. The lack of sound theoretical foundations, though, has never stopped an economist from giving his scientifically worthless economic policy advice.

The question of the aspiring student is: Given that economics is a failed science, I am not so much interested in who messed up what in the last 200+ years, or whether the incompetence has been greater in Chicago than in Cambridge, what I need to know is how the actual economy works. So, do not waste more time with pants kicking, tell me what the fatal mistake/error/blunder is and how to get over it.

Here is ― for the last time ― the bone of contention: “The purported strength of New Classical macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals. To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations ― without ever presenting neither ontological nor epistemological justifications for this claim ― has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if ― after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem ― these economists want to resurrect the omniscient walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.” (See intro)

In brief, Walrasian microfoundations are false. Methodologically, the iron law applies: Because the axiomatic foundations#1 are false the whole analytical superstructure from constrained maximization to DSGE/RBC/New Keynesianism is false.

Unfortunately, Keynesian macrofoundations are false, too.#2 So, there is NO valid economics.

This is the current state of economics: Economists give policy advice without having a scientifically sound theory.#3 Economic theory is a failure because it has been based on methodologically unacceptable axiomatic foundations. Therefore, there is no way around a paradigm shift. In other words, the false Walrasian microfoundations and the false Keynesian macrofoundations have to go out of the window and have to be completely replaced by entirely new macrofoundations.#4

There is no other way out of the scientific mess economics is in. As Hilbert put it: “The axiomatic method is indeed and remains the one suitable and indispensable aid to the spirit of every exact investigation no matter in what domain; ... To proceed axiomatically means in this sense nothing else than to think with knowledge of what one is about.”

Until this very day, neither Orthodoxy nor Heterodoxy got the basic economic concepts and their relations right. And this is why economics is still on the proto-scientific level of incoherent blathering with NO idea ‘of what one is about’.

How science is done is known since more than 2000 years ― except to economists: “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) Because of this “... 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)

The new general rule to apply for economic research, discussion, peer-review and textbooks is: If it isn’t macro-axiomatized, it isn’t economics. This rule vaporizes roughly 99 percent of what has hitherto been accepted as economics. Forgetting all this proto-scientific rubbish enhances scientific productivity enormously.

Egmont Kakarot-Handtke

#1 The microfoundations approach is defined with these five 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)
#2 See ‘How Keynes got macro wrong and Allais got it right
#3 See ‘Paul the Menace
#4 See ‘From false micro to true macro: the new economic paradigm


Related 'The methodological blunders of fake scientists' and cross-references Axiomatization

February 21, 2017

The methodological blunders of fake scientists

Comment on Lars Syll and Alan Musgrave on ‘The logical fallacy that good science builds on’

Blog-Reference

The scientific method is well-defined: “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)

Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

Both, orthodox and heterodox economists claim to do science but obviously lack any deeper understanding. Feynman put is thus: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science, because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

What is missing is a proper understanding of what science is all about. Lars Syll, the heterodox chief methodologist, puts up this straw man: “Scientific arguments are not analytical arguments, where validity is solely a question of formal properties. Scientific arguments are substantial arguments. If Robert Lucas is a Keynesian or not, is nothing we can decide on formal properties of statements/propositions. We have to check out what the guy has actually been writing and saying to check if the hypothesis that he is a Keynesian is true or not.”

This is as sylly as one can get. Science has NEVER been formal logic alone, that is, drawing conclusions from premises without regard to the empirical content of the premises: “In the most fruitful applications of mathematics to the physical world, some nonmathematical axioms also enter. The Newtonian system of mathematical mechanics depends as much on the Newtonian laws of motion and gravitation as it does on the axioms of mathematics.” (Kline)

Both, material and logical consistency has to be established by proof. This, of course, is the hard part of science. The most impressive kind of proof is to derive a logical conclusion from the theory about a hitherto UNKNOWN fact and then to look specifically for it and actually find it. This is the triumph of the perfect hand-in-glove-fitting of material and formal consistency.

“Thirty years after Laplace wrote this apotheosis of mechanics, something happened that tended to prove that mechanics has the power over existence as he described it. In 1846 a French astronomer, Urbain Leverrier, at the end of some calculations in which he confronted the astronomical observations of the known planets with the results of an appropriate mechanical system, was led to proclaim that there existed a still unknown planet, which, moreover, must be visible in a certain region of the sky. Direct observation of that region soon confirmed the existence of that planet, now called Neptune. Neptune, therefore, was discovered not by scanning the firmament with telescope, but ‘at the tip of a pencil’.” (Georgescu-Roegen)

The deduction of hitherto unknown facts is the very opposite of the realists’ flat-earth methodology: “In inference to the best explanation we start with a body of (purported) data/facts/evidence and search for explanations that can account for these data/facts/evidence. Having the best explanation means that you, given the context-dependent background assumptions, have a satisfactory explanation that can explain the fact/evidence better than any other competing explanation — and so it is reasonable to consider/believe the hypothesis to be true.” (See intro)

Not much has been achieved with this methodology. Indeed, it is the very characteristic of Heterodoxy that it talks much about methodology and ontology and philosophy instead of presenting a spectacular new insight as the direct result of their purportedly superior approach.

Heterodoxy simply conflates the axiomatic-deductive method with mathematics: “Deductive logic may work well — given that it is used in deterministic closed models! In mathematics, the deductive-axiomatic method has worked just fine. But science is not mathematics.” (See intro)

No, it is not and never was. It has always been empirical: “But the axioms Science is the attempt to make the chaotic diversity of our sense-experience correspond to a logically uniform system of thought.” (Einstein)

More precisely: “The basic concepts and laws which are not logically further reducible constitute the indispensable and not rationally deducible part of the theory. It can scarcely be denied that the supreme goal of all theory is to make the irreducible basic elements as simple and as few as possible without having to surrender the adequate representation of a single datum of experience.” (Einstein)

In marked contrast to Heterodoxy, Orthodoxy never had any qualms with axiomatics: “In particular, it is supposed, in the main, that there is perfect competition and that the choices of economic agents can be deduced from certain axioms of rationality.” (Arrow, Hahn)

The cargo cultist failure of Orthodoxy is the inability to see that a behavioral assumption like rationality is inadmissible as an axiom because its reality content is zero. Therefore, the whole of Walrasian economics from utility maximization to DSGE/RBC is indeed ― as Heterodoxy always criticized ― an empirically vacuous logical exercise. This, though, is NOT the fault of the axiomatic-deductive method but a misapplication by methodologically incompetent economists.

The characteristic of science is to start with a consistent set of elementary concepts, e.g. mass, force, energy, velocity, acceleration etcetera, because: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen)

As Hilbert put it: “The axiomatic method is indeed and remains the one suitable and indispensable aid to the spirit of every exact investigation no matter in what domain; ... To proceed axiomatically means in this sense nothing else than to think with knowledge of what one is about.”

Until this very day, neither Orthodoxy nor Heterodoxy got the basic economic concepts profit and income right. And this is why economics is still on the proto-scientific level of incoherent blathering with NO idea ‘of what one is about’.#2

Egmont Kakarot-Handtke

#1 See ‘Heterodoxy and the re-invention of science
#2 See ‘If it isn’t macro-axiomatized, it isn’t economics


Related 'The end of traditional Heterodoxy in the Malmö coal pit' and 'The scientific self-elimination of Heterodoxy' and 'Pants kicking is over, let’s do serious economics now' and cross-references Axiomatization and cross-references Paradigm shift

February 20, 2017

NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather

Comment on Simon Wren-Lewis on ‘NAIRU bashing’

Blog-Reference and Blog-Reference and Blog-Reference

NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.

You say: “The way economists have thought about the relationship between unemployment and inflation over the last 50 years is the Phillips curve.”

This hallucinatory Phillips curve has first of all to be rectified.#1 The objective systemic employment equation is shown on Wikimedia. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek 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 employment equation contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. If the average price increases faster than the average wage rate employment decreases.

The systemic employment equation fully replaces the hallucinatory Phillips curve and NAIRU. The equation contains nothing but measurable variables and is therefore testable. No prohibiting measurement problems at all!

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

Economists do NOT have the true employment theory and this explains their endless inconclusive blather about NAIRU which is a NONENTITY like the Tooth Fairy or dancing-angels-on-a-pinpoint.

Egmont Kakarot-Handtke

#1 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

***
REPLY to Blissex on Feb 21, also on MNE

You comment on the rectification of the obsolete NAIRU-Phillips curve: “That sounds very plausible, and the replacement of the imaginary Phillips curve(s) is welcome, but your comment lacks one very important detail, the ‘central banker’s’ question.”

It is a matter of indifference whether ‘that sounds very plausible’. The point is whether the hallucinatory NAIRU-Phillips curve or the objective SYSTEM-Phillips curve is the TRUE representation of the determinants of employment/unemployment.

Scientific truth is methodologically well-defined by material and formal consistency and is established by PROOF and NOT by what ‘sounds plausible’ to Blissex.

Because the NAIRU-Phillips curve is PROVABLE false NO economic policy conclusions can be drawn from it, neither with regard to monetary nor to fiscal policy. Because economists lack the true theory their economic policy guidance has NO sound scientific foundation since Adam Smith.

Everybody has the right to climb on a soap box and to address the Circus Maximus with policy proposals EXCEPT economists. Economics is supposed to be a science and economists are supposed to adhere to scientific standards. This means that economists have to make sure that they have the true theory about how the economy works BEFORE they tell the world how to save the economy.

The fact of the matter is that profit theory, IS theory, theory of money, and employment theory is false.#1 Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for mass unemployment, deflation, depression, stagnation.#2

Before economists in general and Wren-Lewis in particular can address ‘the central banker’s question’ there is a lot of scientific homework to do.#3

Egmont Kakarot-Handtke

#1 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 See ‘How economists murdered the economy and got away with it
#3 See ‘If it isn’t macro-axiomatized, it isn’t economics

***

REPLY to Simon Wren-Lewis on Feb 21, also on MNE

You say: “What I find very dispiriting about most of the comments on this post is a complete failure to engage with what I have said, and say where they disagree. Instead it is more along the lines of repeating the NAIRU is rubbish, without ever giving a coherent account of what exactly is rubbish.”

The microfounded NAIRU-Phillips curve has first of all to be rectified.* The macrofounded SYSTEM-Phillips curve is shown on Wikimedia.

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L.

The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases:
(i) The rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment.
(ii) The rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES.
(iii) The rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES.

So, it is DIFFERENCES in the rates of change of wage rate and price and not the absolute magnitude of change. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment sticks indefinitely where it is. In more general terms the neutrality condition reads W(1+w)/P(1+p)R(1+r)=rhoF=constant.

There is NO such thing as a NAIRU, all depends on relative rates of change. This is a testable proposition.

* See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather

***

REPLY to Anonymous on Feb 23, also MNE

The fatal mistake of the discussion is to accept the NAIRU-Phillips curve (with the well-known disclaimers) and to focus on the economic policy implications with regard to the given situation in the US/UK/etc. But there is NO use to discuss policy if the underlying theory is defective.

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

So what FIRST has to be done is to fix the NAIRU-Phillips curve.* The insight that there is NO such thing as a NAIRU then opens up new economic policy perspectives.

The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the given situation to rise faster than the average price. This opens the way out of mass unemployment, deflation, and stagnation.

If the price mechanism does not spontaneously deliver, as standard economics claims since 200+ years, THIS becomes an issue for economic policy and economics has to figure out the optimal rates of change for wage rate and price.

* For details see ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia


Related 'NAIRU does not exist because equilibrium does not exist' and 'If it isn’t macro-axiomatized, it isn’t economics' and 'The disutility of debunking NAIRU' and 'NAIRU ― a folk psychological hallucination' and 'False theory makes wrong policy: economics as loose cannon' and 'Naive arithmetic' and 'NAIRU, wage-led growth, and Samuelson's Dyscalculia' and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy' and 'NAIRU and economists’ lethal swampiness'

Walras, Keynes, Samuelson, DSGE, IS-LM ― R.I.P.

Comment on Roger Farmer on ‘Let’s All Be Keynesians Now’ and on ‘Animal Spirits in a Monetary Model’

Blog-Reference and Blog-Reference

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

This elementary syllogism is inconsistent because Keynes never came to grips with profit (Tómasson et. al.). As a result, all I=S models and all IS-LM models are false.#1,#2

Because Keynesian macro is inconsistent any synthesis with inconsistent Walrasian micro is inconsistency squared since Samuelson.#3

The common denominator of Keynes, Walras, Samuelson, Farmer and Platonov is that they have NO idea of the pivotal concept of the subject matter, that is, of profit. That is disqualifying for an economist.

In methodological terms, axiomatically false is the death sentence for a paradigm, because when the foundational premises are inconsistent the whole analytical superstructure falls apart.

The representative economist has not realized until this very day that there is NO such thing as fresh thinking about analytical monstrosities that were already dead in the cradle 140+ and 80+ years ago.

Egmont Kakarot-Handtke

#1 See ‘How Keynes got macro wrong and Allais got it right'
#2 See ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
and cross-references Refutation of I=S
#3 See ‘The father of modern economics and his imbecile kids

February 19, 2017

NAIRU does not exist because equilibrium does not exist

Comment on Lars Syll on ‘Debunking the NAIRU myth’ and on Brian Romanchuk on ‘NAIRU Should Be Bashed, Smashed, And Trashed’

Blog-Reference and Blog-Reference

The current state of economics is this: Walrasian microfoundations are false since 140+ years and Keynesian macrofoundations are false since 80+ years.#1 By consequence, employment theory, too, is false and this, of course, includes NAIRU.#2 What is urgently needed is true macrofoundations and the true employment theory.

Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for unemployment, deflation, depression, stagnation.#3

What orthodox employment theory says is this: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin)

What microfounded supply-demand-equilibrium economics says is that there is a NEGATIVE relationship between wage rate and employment. From the true macrofoundations follows that the MACROECONOMIC relationship between wage rate and employment is POSITIVE.

It should be possible to empirically establish which of the two opposing propositions is true. In fact, the Great Depression and the current mass unemployment gives one a clear hint that supply-demand-equilibrium in general and labor market theory in particular is dead wrong.#4

Egmont Kakarot-Handtke

#1 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 See ‘NAIRU ― a folk psychological hallucination
#3 See ‘How economists murdered the economy and got away with it
#4 See ‘Macroeconomics without Keynes

***

REPLY to Ralph Musgrave on Feb 19

You argue: “The fact that there is little empirical evidence to support NAIRU is easily explained by the amount of background noise. Same problem applies in other subjects (chemistry, astronomy, etc). But in subjects other than economics, it is normally possible to do experiments where non-relevant variables , i.e. ‘other stuff’, is held constant. In economics that is not possible normally.”

This is one of the oldest excuses of economists which can be traced back to Hume and Mill: “There is a property common to almost all the moral sciences, and by which they are distinguished from many of the physical; this is, that it is seldom in our power to make experiments in them.” (Mill)#1

The solution of this methodological problem consists in making a system science out of the moral or behavioral or social proto-science of economics. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed behavioral microfoundations to entirely new systemic macrofoundations.

In the following a sketch#2 of the correct employment theory is given. The most elementary version of the objective systemic employment equation is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek 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 employment equation contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

The systemic employment equation fully replaces the bastard Phillips curve and NAIRU.#2, #3 The equation contains nothing but measurable variables and is therefore testable.

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

Economists do NOT have the true theory and this explains their endless inconclusive wish-wash. In their scientific incompetence both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment. Economists are not only hopeless blatherers but a real danger for their fellow citizens.

#1 See also ‘Failed economics: The losers’ long list of lame excuses
#2 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#3 For the relationship between profit and employment see ‘Have data, lack theory

***

REPLY to Tom Hickey on Feb 19

Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this the neo-Walrasian axioms* are methodological madness to begin with. There is NO need to invoke the Sonnenschein-Mantel-Debreu theorem in order to refute/unlearn standard economics.

The subject matter of economics is NOT the behavior of humans but the behavior of the economic system.** See ‘The existence of economic laws and the nonexistence of behavioral laws’.

* The microfoundations approach is defined with these five 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)
** The macrofoundations approach is defined with these three BEHAVIOR-FREE systemic axioms: (A0) The objectively given and 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. (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.

***

REPLY to Matthew Franko, Tom Hickey on Feb 20

Seems you lost your way. The point at issue is NAIRU and not the relationship between investment and saving. The latter is given by Qm=I-Sm, i.e. monetary profit is equal to the difference between investment and monetary saving. For more details see ‘Wikipedia and the promotion of economists’ idiotism’ and cross-references Refutation of I=S

***

ICYMI on Feb 20

NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
Comment on Simon Wren-Lewis on ‘NAIRU bashing’

NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.

You say: “The way economists have thought about the relationship between unemployment and inflation over the last 50 years is the Phillips curve.”

This hallucinatory Phillips curve has first of all to be rectified.#1 The objective systemic employment equation is shown on Wikimedia. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek 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 employment equation contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. If the average price increases faster than the average wage rate employment decreases.

The systemic employment equation fully replaces the hallucinatory Phillips curve and NAIRU. The equation contains nothing but measurable variables and is therefore testable. No prohibiting measurement problems at all!

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

Economists do NOT have the true employment theory and this explains their endless inconclusive blather about NAIRU which is a NONENTITY like the Tooth Fairy or dancing-angels-on-a-pinpoint.

#1 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster


Related 'Why you should NEVER use supply-demand-equilibrium' and 'The key to macro and Keen's debt-employment model' and 'Economics and the social science delusion' and 'From Orthodoxy to Heterodoxy to Sysdoxy' and 'The key to macro and Keen's debt-employment model' and 'Unemployment is high because economics is false: period, full stop, end of story' and 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather' and 'NAIRU and economists’ lethal swampiness'

February 17, 2017

Why you should NEVER use supply-demand-equilibrium

Comment on Peter Dorman on ‘Why You Should Never Use a Supply and Demand Diagram for Labor Markets’

Blog-Reference and Blog-Reference

As can be seen in every textbook, economists answer any question by painting the triad SS-function―DD-function―equilibrium. Leijonhufvud called this analytical tool totem of the micro/totem of the macro. What economists do not understand until this day is that there is NO such thing as an economic equilibrium and NO such thing as SS and DD functions. The totem of micro/macro is a NONENTITY like the Tooth Fairy or the Easter Bunny.

After economists have applied their standard analytical workhorse supply-demand-equilibrium for more than a century self-doubts arise, at least with regard to the labor-market: “S&D is simply the wrong model, based on a failure to distinguish between offers and transactions.” (see intro)

But economists never bury one self-delusion without advertising the next: “Fortunately, there’s a better model out there, search theory, with fairly straightforward intuitions and tons of available data.”

What the representative economist fails to realize is that the foundational error/mistake/ blunder of the supply-demand-equilibrium approach lies in the microfoundations.#1 The lethal methodological blunder can be stated as an impossibility theorem: NO way leads from the explanation of individual behavior to the explanation of how the economic system works. Because of this, the microfoundations approach has already been dead in the cradle 140 years ago.

What the representative economist fails to realize is that the economy as a system is defined by the interrelationship of a number of elementary variables. Every model, no matter how differentiated, must contain these OBJECTIVE SYSTEMIC interrelationships as its formal hard core. In other words, the false microfoundations have to be replaced by the true macrofoundations. This in turn leads to an objective systemic theory of the labor market.#2

All this is forever beyond the horizon of the representative economist who can easily drop what he sold as the true model yesterday but not methodological individualism because: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

The commitment to microfoundations is the ultimate reason why economics in general and labor market theory in particular is false. The search theory of the labor market is no exception.

Egmont Kakarot-Handtke

#1 The microfoundations approach is defined 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)
#2 See ‘The one stone that kills orthodox and heterodox employment theory

Related 'Essentials of Constructive Heterodoxy: The Market' and 'The Law of Supply and Demand: Here It Is Finally' and 'How to Get Rid of Supply-Demand-Equilibrium'

***

REPLY to Stephen Williamson on Feb 17

Already Schumpeter found it necessary to diffuse doubts about the scientific content of the supply-demand-equilibrium approach: “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”

As a matter of fact, the ‘primitive apparatus of the theory of supply and demand’ is a thoroughly faulty construct: “There is little or nothing in existing micro- or macroeconomics texts that is of value for understanding real markets. Economists have not understood how to model markets mathematically in an empirically correct way.” (McCauley, 2006)

For the methodologically correct approach see: ‘Essentials of Constructive Heterodoxy: The Market

***

REPLY to ProGrowthLiberal on Feb 19

You say: “In my Brooklyn neighborhood, there are competing stores a few blocks apart. So if I cannot buy milk in one I go to the other.”

That is rather smart, but it escaped your attention that this thread is about the LABOR market and neither about the goods market in general nor the Brooklyn milk market in particular.

The SS-function―DD-function―equilibrium approach is false for BOTH the goods and the labor market because ALL microfounded approaches are methodologically false. The macrofounded approach delivers the following testable macro employment equation = true Phillips curve.

Explanations haven been given elsewhere.


Related 'NAIRU does not exist because equilibrium does not exist' and 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'

If it isn’t macro-axiomatized, it isn’t economics

Comment on Lars Syll on ‘Modern macroeconomics — too much micro and not enough macro’

Blog-Reference

There are an infinite number of explanations that can be given for anything. And, even those explanations that have de facto zero reality content have psychological plausibility and phenomenological realism, that is, references to real places, real persons and real events. So, what we have is a state of ambiguity with an excess of explanations that are false but either not disproved or not disprovable because they deal with nonentities.

This is a very old problem and it has been tackled and solved more than 2000 years ago: “There are always many different opinions and conventions concerning any one problem or subject-matter .... 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 ... on the other.” (Popper)

In order to overcome the plurality of false explanations the ancient Greeks invented science. Basically, science is a sorting process that consists in sifting trough the huge pile of contradicting explanations in order to figure out which one is true. This is not an easy task and it is severely hampered by the fact that humans are prone to observational and logical errors and mistakes.

Science is the systematic elimination of the natural ambiguity and inconclusiveness of explanations in order to finally arrive at a clear-cut true/false result: “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)

The goal of science is the true theory, that is, the humanly best mental representation of reality.

Confronted with the vastness and complexity of reality every branch of the sciences is confronted with the problem of where to start. John Stuart Mill put it thus: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

Krugman, for example, is quite explicit about how he has solved the starting problem: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

The neoclassical world 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)

These microfoundations are the wrong starting point as almost everybody knows by now. Economics from Jevons/Walras/Menger to DSGE/RBC/New Keynesianism is a scientific failure, that is, it is materially/formally inconsistent.#1 As a logical consequence, the false microfoundations have to be fully replaced by the true macrofoundations.#2

There is a simple rule for spotting and eliminating false models: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 See also: ‘Economists’ three-layered scientific incompetence
#2 See ‘How to restart economics


Related 'We are not yet out of the wood; in fact, we are not yet in it' and 'First Lecture in New Economic Thinking'. For more details of the bigger picture see cross-references Incompetence and cross-references Axiomatization and cross-references Paradigm shift

February 16, 2017

Economics, Plato’s Cave and the Silver Blaze Case

Comment on Noah Smith on ‘My AMA on r/badeconomics’

Blog-Reference and Blog-Reference on Feb 19

There has been a wave of indignation about fake news lately. What people overlook is that fake news are not such a big problem because, as a matter of principle, everybody has a reasonable chance to realize the fake either immediately or after some cross-checking. The real problem is No-news because, as a matter of principle, you don’t see what you don’t see and you don’t hear what you don’t hear. The quandary resembles that of critically ill persons who do not know and, worse, do not get any chance to learn that an effective cure for their disease is available.

So, on closer inspection, there is a double fake: (i) the falsity that you are drowned with (= the alpha-fake), and the truth that you do not even know exists (= the beta-fake). The alpha-fake has been dealt with by Plato in the Allegory of the Cave. The beta-fake has been dealt with by Arthur Conan Doyle in The Adventure of Silver Blaze.

The alpha-fake: “Plato has Socrates describe a group of people who have lived chained to the wall of a cave all of their lives, facing a blank wall. The people watch shadows projected on the wall from objects passing in front of a fire behind them, and give names to these shadows. The shadows are the prisoners’ reality. Socrates explains how the philosopher is like a prisoner who is freed from the cave and comes to understand that the shadows on the wall are not reality at all, for he can perceive the true form of reality rather than the manufactured reality that is the shadows seen by the prisoners. The inmates of this place do not even desire to leave their prison; for they know no better life.”#1

We have three interconnected elements: (i) objective reality, (ii) the medium or in-between, (iii) subjective reality. The medium (hearsay, gossip, storytelling, propaganda, newspapers/books/videos/TV/Internet, scientific lectures/videos/papers/books) mediates all non-direct-non-immediate events/facts. Depending on the medium and the subject’s processing capacities the subjective reality can deviate more or less from objective reality. In the most extreme case, subjective reality becomes hallucinatory, that is, almost completely devoid of reality content.

Subjective reality is self-stabilizing, independently of the degree of deviation from objective reality. Plato described the fake reality inside the cave as the natural state of humanity with the exception of philosophers/scientists. The difference between Plato and the actual condition is that the shadows on the cave wall have been fully replaced by colored pictures on a screen.

The beta-fake: “One of the most popular Sherlock Holmes short stories, ‘Silver Blaze’ focuses on the disappearance of the eponymous race horse (a famous winner) on the eve of an important race and on the apparent murder of its trainer. The tale is distinguished by its atmospheric Dartmoor setting and late-Victorian sporting milieu. It also features some of Conan Doyle’s most effective plotting, hinging on the ‘curious incident of the dog in the night-time’. Gregory (Scotland Yard detective): ‘Is there any other point to which you would wish to draw my attention?’ Holmes: ‘To the curious incident of the dog in the night-time.’ Gregory: ‘The dog did nothing in the night-time.’ Holmes: ‘That was the curious incident.’”#2

What can economists learn from Plato about alpha-fake, i.e. the presence of scientific falsity, and from Arthur Conan Doyle about beta-fake, i.e. the absence of scientific truth.

The alpha-fake: The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter, i.e. profit, wrong. Economics is a failed science. The claim as expressed in the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is a false claim.

In methodological terms, economics is in dire need of a paradigm shift from false microfoundations and false macrofoundations to consistent macrofoundations.#3 Therefore, it is rather straightforward to identify proto-scientific rubbish: if it isn’t macro-axiomatized, it isn’t economics.

The beta-fake: What does the absence of expected facts, that is, of a materially and formally consistent economics mean? It could mean (a) that ALL orthodox and heterodox economists are incompetent scientists, or (b), that the dog cannot be heard barking, that is, the true theory exists but all hints and pointers are either promptly covered, explained away, diluted with floods of irrelevancies, or as far as possible removed.

Neither Orthodoxy nor traditional Heterodoxy has the true theory. Why exactly? It is imperative 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 the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. Theoretical economics has been hijacked since the founding fathers by political economics. And politics cannot do other than to corrupt science. The modus operandi of politics is to promote the own agenda and to hinder everything else. Political economists do not produce or promote scientific truth as an end in itself but apply the outer form if and insofar as it seems to help the agenda. Scientific knowledge that lies outside the agenda’s perimeter is ignored, blighted, hindered, covered, or suppressed.#4 Where policy dominates the dog’s barking cannot be heard.

The good thing about alpha-fake is that it is possible to spot it. Beta-fake is invisible. How to deal with it? Beware of top ten charts, beware of two-way promotional expert talk, ignore the recommendations of the representative economist, pursue his denunciations. In economics, which is a cargo cult science, it is the absence of expected facts that points the way to the missing truth. When both orthodox and heterodox economists, which have proven their utter scientific incompetence over 200+ years and are still wondering about the supply-demand-equilibrium shades in Plato’s cave, dismiss an alternative approach there might be great reason to allow this approach to be true.

The specifics and differences between the four false economic approaches is cave dweller blathering stuff. The absence of the true theory is the only worthwhile issue of economics.

Egmont Kakarot-Handtke

#1 Wikipedia
#2 Wikipedia
#3 See ‘From Orthodoxy to Heterodoxy to Sysdoxy
#4 The violation of scientific standards/ethics is the very definition of political economics. The question is not so much whether it happens but to which extent. See here.

Related 'Economics is a science? You must be joking!' and 'Why not simply throw all economists under the bus?' and 'Economics, methodology, morals ― a creepy freak-show' and 'New economic thinking, or, let’s put lipstick on the dead pig'

February 13, 2017

Economics is a science? You must be joking!

Comment on Lars Syll on ‘Dani Rodrik a heterodox economist? You must be joking!’

Blog-Reference and Blog-Reference

What ― roughly ― is an orthodox economist? An OE believes that ...
(OE1) “There is nothing basically wrong with standard theory and economics textbooks.”
(OE2) “An aspiring economist has to formulate clear models.”
(OE3) “These models can incorporate a wide range of assumptions.”
(OE4) “If it isn’t modeled, it isn’t economics.”
(OE5) “Newer generations of models do not render the older generations wrong or less relevant.”

What ― roughly ― is a traditional heterodox economist? A HE believes that ...
(HE1) “There is a lack of fundamental diversity and a narrowing of the curriculum.”
(HE2) “There is a frustrating lack of real world relevance.”
(HE3) “A more open and pluralistic theoretical and methodological attitude is needed.”
(HE4) “We really don’t want to be force-fed with mainstream neoclassical deductive-axiomatic analytical formalism.”
(HE5) “The slogan ‘If it isn’t modeled, it isn’t economics’ is not pluralism but a methodological reductionist straightjacket.”
(HE6) “Analytical formalism and mathematical methods often makes the analysis irrelevant from an empirical-realist point of view.”
(HE7) “Variations of the same old mathematical-deductive ilk are not heterodox in any substantial way.”

What ― roughly ― is a theoretical economist (= scientist in contradistinction to the agenda pusher of political economics) or constructive heterodox economist. A cHE holds that ...
(cHE1) “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)
(cHE2) Neither Orthodoxy nor traditional Heterodoxy has the true theory. Economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and all got the pivotal economic concept profit wrong.#1
(cHE3) Standard theory and economics textbooks are scientifically worthless.#2
(cHE4) Since Adam Smith economic policy guidance never had a sound scientific foundation.#3
(cHE5) Economics is in need of a paradigm shift from false microfoundations and false macrofoundations to consistent macrofoundations.
(cHE6) If it isn’t macro-axiomatized, it isn’t economics.
(cHE7) The pluralism of false theories is indefensible.
(cHE8) The true theory is characterized by material and formal consistency. The true theory is not a matter of belief, credibility, authority, tradition, majority, political color or opinion but of proof.
(cHE9) A materially/formally consistent theory is the best mental representation of reality that is humanly possible. There is only one true theory, the rest is either proto-scientific rubbish (storytelling, political economics) or provable false or undecidable/inconclusive wish-wash, that is, it belongs forever to the intellectual swamp where “nothing is clear and everything is possible.” (Keynes)
(cHE10) Theoretical economics has to be judged according to the criteria true/false and NOTHING else. The criteria like/dislike or good/bad or good/evil or useful/useless or right/left do NOT apply. They apply in the political sphere but not in the scientific sphere.
(cHE11) Theoretical economics has been hijacked since the founding fathers by political economics. Politics cannot do other than to corrupt science. In order to eliminate the ultimate cause of the failure of both Orthodoxy and traditional Heterodoxy a strict separation of politics and science has to be established in what hitherto counted as economics.
(cHE12) The claim as expressed in the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” cannot be upheld. Currently, economics does not satisfy the well-defined criteria (material/formal consistency) of science. Both Orthodoxy and traditional Heterodoxy is proto-scientific rubbish or what Feynman called cargo cult science.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith
#2 See ‘The father of modern economics and his imbecile kids
#3 See ‘Unemployment is high because economics is false: period, full stop, end of story

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REPLY to Ralph Musgrave on Feb 14

There is no need to wreck your brain with my longer posts. Here is the 209 character summary of ALL posts for people with a reduced attention span:

The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter, i.e. profit, wrong.

Economics is a failed science and both orthodox and heterodox economists are incompetent scientists. This applies to Rodrik, Syll, Musgrave, to name only three, otherwise this is going to become an overly long post.


Related cross-references Incompetence and cross-references Pluralism and cross-references Paradigm-shift and 'The methodological blunders of fake scientists'

February 10, 2017

Windmill economics

Comment on Lars Syll on ‘Why governments should run deficits’

Blog-Reference and Blog-Reference

Lars Syll provides a mixture of political and economic arguments in favor of deficit spending. These arguments are based on his perception of how the monetary system works. Unfortunately, Lars Syll knows only one thing for sure, i.e. that Orthodoxy is false, but has not yet arrived at a valid heterodox economics. Because of this, all his policy proposals lack sound scientific foundations.

With regard to employment policy, he wholeheartedly propagates Keynesian deficit spending without realizing that Keynesianism is theoretically defective and deficit spending has some distributional secondary effects that are not compatible with his own normative ideas of the Good Society.

As with Don Quixote, good intentions paired with incompetence produce tragic results.

For details see:
― Macroeconomics ― dead since Keynes
― Unemployment is high because economics is false: period, full stop, end of story
― Rethinking deficit spending.

Egmont Kakarot-Handtke

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REPLY to Ralph Musgrave on Feb 11

You say: “Egmont Kakarot-Handtke central point seems to be that Keynes did not understand profit. Given that every convenience store owner understands what profit is, it is totally absurd to claim Keynes didn’t understand it.”

The idea that ‘every convenience store owner understands what profit is’ is itself of utmost absurdity for anyone who has grasped what science is all about. This is what J. S. Mill, the great methodologist among the founding fathers, had to say about commonsensers in general: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”

So much for the understanding of convenience store owners.

What most people who call themselves economists do not understand is that the very characteristic of science is that it goes BEYOND common sense: “... it is precisely the task of science to supersede crude common-sense notions by critical analysis, and further that it is the unsatisfactory state of the foundations beneath the common-sense surface which is the most serious and crippling deficiency of contemporary economic science.” (Hutchison)

The ‘most serious and crippling deficiency of contemporary economic science’ is that the representative economist has NO idea of the pivotal economic concept of profit. Keynes was no exception: “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.)

Scientifically, Keynes never rose above the level of a convenience store owner.

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: the confused confusers of economics have NO idea what the pivot of their subject matter is. In still other words, because this bunch of scientific deplorables#1 does not know how the profit mechanism works it does not know how the market economy works. Economics is proto-scientific rubbish and this goes from Adam Smith to Keynes and beyond.

After- and Post-Keynesians and MMTers have not spotted Keynes’s foundational blunder until this very day.#2,#3 The scientific incompetence of economists ― Walrasians, Keynesians, Marxians, Austrians ― is beyond absurd.

#1 See ‘How the intelligent non-economist can refute every economist hands down'
#2 See ‘How Keynes got macro wrong and Allais got it right
#3 See ‘Going beyond Wicksell, Keynes and MMT

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REPLY to Bob Roddis on Feb 13

Your question of February 11 has to be put into a macroeconomic context or what Keynes called the ‘monetary theory of production’ and it has to be answered in GENERAL terms, that is, without the technicalities of the US banking system. In other words, the whole banking system is reduced to the central bank which has only deposits on the liability side of its balance sheet and overdrafts on the asset side. The deposits are money and they are created uno actu with overdrafts, that is, deposits = overdrafts or central bank liabilities = central bank assets.

The most elementary configuration constitutes the analytical starting point: “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.” (Morgenstern)

Scenario_0#1: The economy starts with employment L. There is only wage income Yw = 100 monetary units [e.g. billion $]. Productivity R and output O remain constant. Consumption expenditures C are equal to wage income, i.e. C = Yw. By consequence, profit of the business sector is zero. Wage payments to the household sector consist of deposits (= overdrafts of the business sector). Through consumption expenditures the household sector’s deposits are again reduced to zero. The stock of money = deposits is zero at the beginning and at the end of the period.#2 During the period money is created and destroyed through the autonomous transactions (wage payments and consumption expenditures) of the business and the household sector.

In the initial scenario, the household sector’s budget is balanced, i.e. C=Yw, and the product market is cleared, that is, the quantity bought X is equal to the quantity produced O, i.e, X=O,  at the market clearing price P (see chart).

Scenario_1: The government needs part of the current output in period 1. The need is legitimate and undisputed, e.g. war. The government taxes the wage income in period 1. Disposable income is reduced by 10 units from 100 to 90. Households reduce consumption expenditures in step from 100 to 90. Government fully spends the income tax of 10 units, that is, total consumption expenditures C remain unchanged and the market clearing price P remains constant. Both, private and public households fully consume their respective shares of output O. There is no real transfer of goods between periods. The war is fully paid for by taxes in period 1. In the following periods income tax is again zero and everything else is like in the initial scenario.

Scenario_2: NO income tax. Households reduce consumption expenditures C voluntarily from 100 to 90 in period 1. Through saving of 10 units the household sector’s current deposits at the central bank increase. At the same time government spends 10 units and takes up overdrafts at the central bank. Both sides of the central bank’s balance sheet are equal. Households’ deposits = government’s overdrafts. Total consumption expenditures C and market clearing price P remain unchanged.

No changes happen in period 2, 3, 4. The households keep the deposits and the government keeps the overdrafts. Interest payments are left out of the picture.

In period 5 the government is supposed to pay back the overdrafts. The wage income of 100 is taxed with 10 units. Disposable income is reduced to 90. The government uses the 10 units of income tax to reduce its overdrafts to zero. At the same time, the household sector dissaves 10 units, i.e. reduces its deposits to zero. Consumption expenditures C are then equal to disposable income 90 plus dissaving 10 = 100. The balance sheet of the central bank at the end of period 5 is again zero as in the initial period. Deposits = money and overdrafts are ‘destroyed’, the creation of period 1 is fully reversed.

What happens in scenario_2 in comparison to scenario_1 is that the taxation for the war is shifted from period 1 to period 5. In real terms there is NO difference at all. Real consumption of the household sector is in both cases reduced in period 1. In other words, the taxes are paid in period 5 with the saving of 10 units in period 1. That’s all.

Nothing changes in real terms when the government issues bonds with a volume of 10 units in period 2. The household sector’s deposits are reduced to zero and so are the governments overdrafts. The central bank’s balance sheet reduces to zero. The household sector holds bonds instead of deposits and the government switches overdrafts into bond liabilities. The central bank is out as an intermediary and there is a DIRECT creditor-debtor relationship between the household and the government sector in the form of bonds or similar types of government securities.

In period 4 the whole securitisation transaction is exactly reversed. The government sector takes up 10 units overdrafts and redeems the bonds. Accordingly, the household sector’s stock of bonds is reduced from 10 to zero and the deposits go up from zero to 10.

In period 5 the households are taxed, they dissave and the government fully repays the overdrafts. In period 6 everything is again as it was in the initial period.

In real terms, the securitization over period 2, 3, 4 makes absolutely no difference. Only the form of assets and liabilities changes. The household sector hold bonds instead of deposits.

Now it is assumed that the central bank buys the bonds in period 4 from the household sector. So the household sector’s stock of bonds goes down to zero and deposits go up to 10. The central bank has now 10 units of bonds on the asset side instead of government overdrafts. The credit relationship between central bank and government takes now the form of bonds.

If the government taxes the households in period 5 it can redeem the bonds which are held by the central bank. Everything else is as in the previous scenario.

If, on the other hand, the central bank keeps the bonds and the government does not tax the households the repayment of the war debt is simply postponed indefinitely. The household sector keeps its saving of period 1 in the form of deposits = money instead of bonds. The households can buy and sell bonds from and to the central bank and thereby change their liquidity. The sum of bonds and deposits is always 10.

The situation only changes if the households dissave. In this case, consumption expenditures increase from 100 to 110 and deposits reduce to zero. Because output remains unchanged the market clearing price P rises and the business sector now makes a profit of 10 units, i.e. equal to dissaving. Accordingly, the business sector’s deposits go up while those of the household sector go down by the same amount. The balance sheet of the central bank does not change, only the owners of the deposits change.

In the next period consumption expenditures and the market clearing price fall back to their previous level.

As long as the government does not tax the households everything remains unchanged for an indefinite time. The trouble comes when the net income falls due to taxation from 100 to 90 and consumption expenditures fall also to 90 because now there is no dissaving. In this case, the market clearing price falls and the business sector makes a loss of 10 units which reduces its deposits to zero.

Now the government is in the possession of 10 units of deposits from taxation which can be used to redeem the bonds. After this action the stock of money and bonds is again zero.

Again, in real terms NOTHING has changed. The households have paid for the war in terms of output in period 1. Everything else is basically a deferment of taxes. The central bank can extend the deferement in principle until eternity by buying the government securities and keeping them on the asset side.

#1 (A0) The objectively given and 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. (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.
#2 The idealized transaction pattern looks like this. The wage rate and the market clearing price in period 2 is doubled. All real magnitudes remain unchanged.

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REPLY to Bob Roddis, continued on Feb 13

Scenario_3: NO income tax and NO saving of the household sector in period 1. Households do NOT reduce consumption expenditures C = 100 and accordingly their deposits are zero at the beginning and the end of period 1. Government takes up overdrafts at the central bank and spends these 10 units IN ADDITION to the households, so total consumption expenditures are now 110. Since output remains unchanged the market clearing price now rises and the business sector makes a profit of 10 which is equal to the government’s budget deficit. At the central bank, the business sector’s deposits are 10 and government overdrafts are also 10 at the end of period 1. The redistribution of current output O between the household and the government sector does not happen via the income tax or saving but via the market clearing price.

In real terms, there is again NO difference between the scenarios. The difference compared to scenario_2 is that the business sector now has 10 units deposits instead of the household sector because the households do not save and the business sector makes a profit of 10 units. Business sector’s deposits = money = government’s overdrafts.

In the next period, the market clearing price falls back to the initial level. The business sector can hold its deposits indefinitely and the government can keep its overdrafts indefinitely. Alternatively, the government sector can sell bonds to the business sector which takes the central bank out of the loop and establishes a DIRECT credit relationship between business sector and government. Deposits = money reduce again to zero.

As long as the government does not tax the households everything remains unchanged for an indefinite time. The trouble comes when the net income falls due to taxation from 100 to 90 and consumption expenditures fall also to 90 because now there is no dissaving. In this case, the market clearing price falls and the business sector makes a loss of 10 units which reduces its deposits to zero. The one-period ‘inflation’ of period 1 is reversed by a one-period ‘deflation’ in period 5.

The government is now in the possession of 10 units of deposits from taxation which can be used to redeem the bonds. After this action the stock of money and bonds is again zero. Everything is then again as in the initial period.

In scenario_1 the households pay income tax in period 1 and NO credit relationships ensue. In scenario_2 the tax payment is deferred via saving in period 1 and dissaving in period 5. In scenario_3 we have instead of the saving/dissaving of the household sector profit in period 1 and loss in period 5. Over all periods profit and loss cancel out. In scenario_2 profit is zero over all periods.

In REAL terms there is absolutely NO difference between the scenarios. The significant difference is between the saving/dissaving scenario and the profit/loss scenario. Because MMT lacks the proper macrofoundations (see footnote #1 above) these folks NEVER got this ALL-DECISIVE difference. It is pretty obvious that the problem of scenario_3 lies in its DISTRIBUTIONAL effect. This scenario in effect PRODUCES the overall profit of the business sector. In other words, Keynesian deficit spending is the biggest pro-one-percenter profit booster ever. How this is compatible with the Keynesian rhetoric for a more equal income distribution remains forever a mystery.

Keynesians and MMTers simply do NOT understand what profit is and how the profit mechanism works. This is disqualifying for an economist, isn’t it?