May 31, 2017

Toward a non-Neanderthal employment policy

Comment on Brad DeLong on ‘Why Is the FOMC So Certain the U.S. Is "Essentially at Full Employment"?’

Blog-Reference and Blog-Reference

The question is not so much whether to replace the unemployment rate by the employment-to-population ratio as a metric for the labor market condition but to clarify the relationship between employment, wage rate, price and productivity. These issues have been dealt with the help of the analytical tool of the (bastard) Phillips curve.

The fact of the matter is that Phillips curve labor market theory is Neanderthal economics.* The elementary version of the correct objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (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.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

From this follows that if rhoF is kept constant employment is kept constant. In other words if the wage rate rises with the same rate as price times productivity employment is kept constant. If the FED wants to increase employment and price it has to set the PRIORITIES right and see to it that the average wage rate increases.

Unfortunately, the price mechanism DESTABILIZES the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down - rhoF down - employment down - and so on. In other words, the market economy is inherently unstable. The core claim of equilibrium economics is provable false. Standard employment theory is false since 200+ years but still in use in the FED Neanderthal.

Egmont Kakarot-Handtke

* For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

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REPLY to pgl on May 31

You say: “Simply put ― we are not yet at full employment.” Agree. But then, it is economists who bear the intellectual responsibility for the social devastation of unemployment because economic policy has no sound scientific foundation. Economists are failed or fake or Neanderthal scientists and this is ― simply put ― the ultimate reason why “we are not yet at full employment.”

Your comment does not much to improve the situation.

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REPLY to pgl on May 31

“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. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997)

This is a generalization of partial analysis and this primitive methodological mistake is known since antiquity as fallacy of composition.

The correct systemic employment equation (above) says exactly the opposite. This means that the remedy that “economists have all learned” WORSENS the situation. Which brings us to Napoleon: “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)

Economics is a failed science and Brad DeLong and you are part of the incompetent crowd that reduces the economy to dust.

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COMMENT on Edward Lambert on Jun 1

Keynesianism is axiomatically false since 80 years.#1 Effective demand is only part of the employment equation.#2 Because of this Keynes’s employment theory is provable false.#3 There is NO use to quote the GT, better to get out of the Neanderthal because in your ignorance you are part of the problem.#4

#1 See ‘How Keynes got macro wrong and Allais got it right
#2 See ‘Keynes saw the problems but did not solve them
#3 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#4 See ‘Mass unemployment: The joint failure of orthodox and heterodox economics


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COMMENT on Robert Waldmann on Jun 4

It is pretty obvious that the participation rate varies with the age structure of a population and is lower in an aging population. Now, one can argue that it is ‘too low’ given the underlying age structure and given the observation that people retire/are retired earlier than 30 years ago.

Let us be satisfied for the moment with the diagnosis ‘too low’ in order not to be distracted by a pointless discussion about measurement problems. So the practical question is how to increase overall employment in the economy. This is a very old and fundamental question of economics and economists have answered it thus: “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. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997)

This answer is dead wrong because it is a generalization of partial analysis and this primitive methodological mistake is known since antiquity as fallacy of composition.

The other answers to the employment problem are monetary and fiscal policy. Let us put these options aside as not feasible for the moment and focus on the price mechanism. To recall, one of the core tenets of standard economics has always been that the uninhibited working of the price mechanism establishes full employment of ALL factors. Of course, it was always understood that things do not work perfectly in real life.

Now, it has been proved that the price mechanism does NOT work as supposed, that is, a reduction of the average wage rate does NOT increase employment for the economy as a whole. The correct systemic employment equation* says exactly the opposite. This means that the remedy that “economists have all learned” WORSENS the situation.

From this follows for economic policy that a third tool in addition to monetary and fiscal policy is needed. What has to be achieved is a rectification of the price mechanism. This has nothing to do with stickiness or frictions or other imperfections. Fact is: the perfectly working price mechanism INCREASES unemployment in the economy because there is a positive feedback loop built right into the core of the market economy. Macro-economically it is NOT wage rate down ― employment up, but it is wage rate down ― employment down.

Whoever is tasked with the challenge of increasing employment/participation has to increase the wage rate with a higher rate than price times productivity. This is a SYSTEMIC necessity and has NOTHING to do with social policy. The FED’s attempt to push inflation via monetary policy is counterproductive and proves that the FED and the economists who supply it with policy guidance are still deep in the woods of the economics Neanderthal. What “economists have all learned, and many of us teach” is logically and empirically inconsistent proto-scientific rubbish.

* Wikimedia

May 30, 2017

New macro-micro thinking about the labor market

Comment on Dean Baker on ‘Link Between Low Wages and Low Productivity Growth: High Wages Make Low Productivity Jobs Disappear’

Blog-Reference and Blog-Reference

Labor market theory has two aspects: macro and micro. The macroeconomic equation for the relationship between average wage rate and employment says that the average wage rate must rise in order to increase overall employment.#1

In the second step, differentiation comes in. Different productivities for different firms that sell on one market with one market clearing price means that the profit decreases from the highest productivity firm to the lowest productivity firm. Let us assume for the moment that the profit of the marginal firm is zero.#2

It is obviously not so smart to increase the wage rate in the marginal firm. So, what has to be achieved is to satisfy BOTH the macro condition of a rising average wage rate and the micro condition of not to push the marginal firm over the cliff.

To look, in good old Econ 101 manner, only at the marginal worker in the marginal firm prevents the solution of the employment problem.

Egmont Kakarot-Handtke

#1 See Wikimedia and ‘Full employment: thinking like the macro-boss
#2 For details see ‘Schumpeter and the Essence of Profit

Related 'Productivity and the zombie apocalypse'

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Blog capture May 30 20:36

May 29, 2017

Needed: the Top Ten of substandard economics blogs

Comment on Editor on ‘The 10 most viewed RWER Blog posts in 2016’

Blog-Reference

Every good thing/institution is eventually messed up or abused. This is the social version of the Second Law of Thermodynamics which says that the total entropy of an isolated system can only increase over time. This holds for the internet in general and for economics blogs in particular.

Since economics is a science, the basic idea of the econoblogosphere is to contribute to the dissemination and growth of knowledge. Accordingly, the econoblogosphere becomes dysfunctional if it increases opinion (= doxa) instead of knowledge (= episteme).#1 The econoblogosphere reaches the entropic maximum when it consists entirely of obsolete/ falsified models/theories, political propaganda, and disinformation.

The whole issue is not new: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.” (Morgenstern)

In order to foster the necessary paradigm shift and to prevent the institutional degeneration of the econoblogosphere some attention management is necessary. It consists in a positive list of blogs that foster the growth of scientific knowledge and a negative list of blogs that inhibit science.

While we have any number of journalistic Top Ten lists that rely on the naive metric of clicks or prestige or popularity or optical/communicative attractiveness a Top Ten list of qualitatively deficient and manipulative blogs is lacking. Occasionally, one hears the complaint that posts have been blocked or removed.

It is unknown to what extent scientific standards are violated in the econoblogosphere.#2 The scientific community is based on the principle of self-governance, so the obvious question to ask is whether the economic societies could establish something like a systematic ex post peer review including an Evidence Center for the collection and verification of complaints about agenda pushing/censorship/suppression/manipulation/ fraud.

What economists would like to have is not only an objective list of innovative blogs but also the Top Ten of disinformation, political propaganda, and violation of scientific standards.

Egmont Kakarot-Handtke

#1 See also ‘Economics between cargo cult, farce, and fraud
Media-fake-farce-fraud-storytelling-macro
Economics and truth
Economics: The pluralism of false theories is over
Economists: Incompetent? Stupid? Corrupt?
Feynman Integrity, fake science and the econoblogosphere
#2 My actual list of the Manipulative Dozen is based on a raw estimation of suppressed/ removed posts over a longer time span and reads: 1 Real-World Economics Review blog, 2 Economist’s View, 3 Lars P. Syll blog, 4 EconoSpeak, 5 Uneasy Money, 6 Billy blog, 7 Information Transfer Economics, 8 bradford-delong.com: Grasping Reality with Both Hands, 9 Roger Farmer’s Economic Window, 10 evonomics, 11 Institute for New Economic Thinking, 12 Worthwhile Canadian Initiative

May 28, 2017

Consensus, buddy consensus, scientific consensus, or what?

Comment on Simon Wren-Lewis on ‘Still not getting it after all these years’

Blog-Reference

You argue: “It is therefore a prime duty of government to ensure that, if interest rates have hit their lower bound, fiscal policy is solely directed at allowing monetary policy to raise rates. This idea is not new. It was always implicit in New Keynesian theory and what I call the Consensus Assignment. Paul Krugman, Brad DeLong and others have been going on about it at least since the financial crisis.”

And: “This is not one particular theory of monetary and fiscal policy interaction. It is the consensus theory.”

The consensus comprises a number of New Keynesian economists. Now it is known that both old and new Keynesian economics is axiomatically false.#1 It is also known that Walrasianism is false from supply-demand-equilibrium onward to DSGE.#2

The consensus among scientists is that economics is a failed science and urgently needs a paradigm shift. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. Because of this, economic policy guidance NEVER had sound scientific foundations.

Within this dire context, the reference to a New Keynesian consensus does not cut much ice.

Egmont Kakarot-Handtke

#1 See ‘Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
#2 See also ‘First Lecture in New Economic Thinking

First Lecture in New Economic Thinking

Comment on Barkley Rosser and Sandwichman on ‘Fighting Zombies with Zombies’

Blog-Reference

1. How Walrasians got it wrong

The microfoundations approach is based on methodological individualism and clearly defined by 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 Walrasian approach comes in several variants and a loose definition has been given 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.”

The Walrasian axioms = microfoundations are methodologically unacceptable.#1 Because the axiomatic foundations are false the whole analytical superstructure is false. Walrasian economics is scientifically worthless. Scientific truth is defined by material and formal consistency. Sorta-kinda neoclassical or mainstream economics lacks both.

2. How Keynesians got it wrong

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 conceptually defective because Keynes never came to grips with profit: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Because the formal core of Keynesianism is false the whole analytical superstructure including all I=S, IS-LM and New Keynesian models is false.#2 All variants of Keynesian economics are scientifically worthless.

3. How Marxians, Austrians, and Pluralists got it wrong

The rest of approaches is either not properly axiomatized, that is, the premises are never explicitly stated or consist of an inconsistent combination of Walrasian, Keynesian, and plucked-out-of-thin-air elements. Approaches without clearly stated and consistent premises are scientifically worthless. This applies to ALL of political economics and to ALL psychological/sociological/historical/Human Nature storytelling.

4. Rectification

The Keynesian premises are methodologically superior because they are behavior-free and objective-systemic. Since they are defective with regard to the definition of income/profit they have to be replaced by the correct macrofoundations.

(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

For the graphical representation of this ABSOLUTE formal MINIMUM see Wikimedia.

5. Proofs

(i) The sector balances (Sm≡Yw-C, Qm≡C-Yw) always add up to zero, i.e. Qm+Sm=0 or Qm=-Sm, that is, the business sector makes a monetary profit Qm which is equal to the household sector’s dissaving -Sm or a loss which is equal to saving. From this immediately follows that saving and investment are NEVER equal, neither ex-ante nor ex-post, and ALL Keynesian and Post Keynesian models are provably false.#3

(ii) By expansion of the absolute formal minimum, the profit equation expands to Qm=Yd+(I-Sm)+(G-T)+(X-M). This is a testable proposition because all variables are measurable.

(iii) By expansion of the absolute formal minimum, the employment equation expands also. See on Wikimedia. This is a testable proposition because all variables are measurable.#4

The successful test of propositions that have been logically derived from a consistent axiom set corroborates the axioms: “Whether an axiom is or is not valid can be ascertained either through direct experimentation or by verification through the result of observations, or, if such a thing is impossible, the correctness of the axiom can be judged through the indirect method of verifying the laws which proceed from the axiom by observation or experimentation.” (Morishima)

6. Conclusion

Your comments are another instance of brain-dead blather and utter scientific incompetence.

Egmont Kakarot-Handtke

#1 For detailed arguments, proof, and references see axecorg.blogspot.de
#2 For details see ‘How Keynes got macro wrong and Allais got it right
#3 For details see ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#4 For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

Immediately preceding 'What is the fuss with New Economic Thinking all about?'

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REPLY to Barkley Rosser on May 29

You say: “you have added another fundamental axiom you do not mention in a bunch of the (mostly justifiably unpublished) papers by you that you cite, this A0.”

A0 is a verbal description of what the three following equations refer to. It is NOT an axiom. A0 invokes a picture of the pure production-consumption economy. The zero clearly indicates that it is NOT counted as an axiom.

ALL macro deals with the abstraction of one firm. National accounting in effect aggregates all firms to one firm by eliminating the transactions between them. Keynes’s foundational propositions as given above also refer to one firm=business sector.

Your argument: “It is not now and never has been ever and never will be true that the world economy operates or has operated via a single business enterprise …” is the badge of the moronic realist since science was invented by the ancient Greeks. Just like ‘triangle’ is an idea, the ‘economy’ is an idea. So-called realists do not understand until this day what Plato and Pythagoras meant with idea (see Wikipedia).#1

When Newton laid down the first axiom of motion, i.e. “… an object either remains at rest or continues to move at a constant velocity …” (see Wikipedia), the moronic realist or what J. S. Mill called the bigot of common sense exclaimed: “It is not now and never has been ever and never will be true” that bodies move at constant velocity. And this is what J. S. Mill told the Barkley Rossers and Sandwichmen of his time: “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.”#2

You say: “All this does is make you even more in trouble with Einstein.” Not at all, I am in perfect accordance with Einstein: “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.”#3

One firm is obviously the “not logically further reducible… indispensable and not rationally deducible part of the theory.”

I am not only in perfect accordance with Einstein, but, even better, with the great economist and methodologist J. S. Mill: “They [Einstein and Dirac] agreed that science was fundamentally about explaining more and more phenomena in terms of fewer and fewer theories, a view they had read in Mill’s A System of Logic.” (Farmelo)

Needless to emphasize that Barkley Rosser and the other Trump University economists have never read/understood A System of Logic.

So I am in perfect accordance with J. S. Mill by characterizing the bigots of common sense as ignorant and scientifically incompetent.

#1 “Though there never were a circle or triangle in nature, the truths demonstrated by Euclid would for ever retain their certainty and evidence.” (Hume)
#2 See also ‘Economics, too, has been almost ruined by the bigots of common sense
#3 See also ‘Warning: Einstein can be hazardous to heterodox methodology

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Blog capture May 30

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REPLY to Barkley Rosser on May 30

You say: “There most certainly are objects in constant motion, e.g. the earth going around the sun. Granted it is slowing down very very slowly, but it is close enough to constant for all practical purposes.”

Yes, there are objects with fast and slow motion. Humanity, though, had not to wait for a failed economist like Barkley Rosser to realize this. The point at issue is that Newton (i) took a patently “unrealistic” assertion about motion as the first axiom, and (ii), that Newtonian physics was empirically successful beyond the wildest dreams. Moronic realists or what J. S. Mill called the bigots of common sense did not understand the crucial methodological point then as they do not understand it now: “There is no doubt a strong tendency to revolt against abstract reasoning. Human nature has a strong ‘factish’ element in it. The reasonings of Principia are now accepted. But in the beginning they were ‘mere crotchets of Mr. Newton’s;’ Flamstead, the greatest astronomical discoverer of his day ― the man of facts, par excellence ― so called them; they have irresistibly conquered, but at first even those most conversant with the matter did not believe them.” (Bagehot)

Flamstead, then, can be taken as a perfect example of a moronic realist. The defining difference between the moronic realist and the scientist is that the latter rejects an argument because it is formally/empirically inconsistent but NEVER as “unrealistic”. As Feynman put it: “It does not matter that moos and goos cannot appear in the guess. You can have as much junk in the guess as you like, provided that the consequences can be compared with experiment.” This means for economics that you cannot have NONENTITIES like utility in the premises because NONENTITIES have NO testable consequences. This is why Walrasianism is dead since 140+ years.

The whole discussion about realism or unrealism which is so characteristic for economists is the ultimate proof of their utter scientific incompetence.

You say: “the economy is not an idea. It is a very real thing.” The economy as the subject matter of economics is a mental construct or what Plato called an idea or what may be characterized as idealization/abstraction. A good metaphor for the relationship between idea and reality is that between plan and landscape. An idea/theory must satisfy two criteria in order to be accepted to the corpus of scientific knowledge: material and formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing. The economy is an idea that has to be clearly defined by a set of premises, a.k.a. foundational propositions, a.k.a. axioms. Without clear premises all conclusions are for the waste basket, the whole argument is scientifically worthless, and policy guidance is useless at best.

The idea of the economy which, respectively, Walrasians, Keynesians, Marxians, Austrians have put forward does NOT satisfy the two criteria of science. All of economics is refuted: “… suppose they [the economists] did reject all theories that were empirically falsified … Nothing would be left standing; there would be no economics.” (Hands)

This is the point to start with: economics is a failed science. Both orthodox and heterodox economics is indefensible and to criticize them is a waste of time: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug) Or: “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

The scientific incompetence of the representative economist consists (i) in still defending theories that have been logically/empirically refuted long ago, and (ii), in the incapacity to fully replace defunct approaches by the true theory.

The economist who does not understand that the actual state of economics is that of a failed science is a moron. The economist who does understand that Walrasianism, Keynesianism, Marxianism, Austrianism, and Pluralism is proto-scientific garbage but still defends one of these approaches and claims to do science is a fraudster.

The three career paths of the economist are currently: (i) moron, (ii) fraudster, or (iii) paradigm shifter. Neither you nor Sandwichman nor the rest of your Trump University colleagues belongs to group (iii), i.e. the scientific elite.

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Blog capture May 30

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Blog capture Jun 1

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REPLY to Barkley Rosser on Jun 2

You say: “So, the problem is not profit theory and the failure to distinguish retained profits from distributed ones, it is capital theory and the failure to distinguish unrealized capital gains and realized ones.”

In fact, it is BOTH. Profit theory, as it is taught since 200+ years, fails to axiomatically distinguish between (i) monetary profit and distributed profit and (ii) monetary and nonmonetary profit. Issue (ii) has been dealt with elsewhere.* Your wow-yippee argument proves that you are ill-informed.

Capital is NOT in the axiom set of the pure production-consumption economy which explicitly defines the MINIMUM set. Capital has to be DERIVED from the minimum set and comes logically in a later step. Capital has been dealt with elsewhere.* You are simply ill-informed.

You say: “Oh, and make that second axiom be about output equals per capital output times population. That is even more general, and thus more scientific than your second axiom.”

The relationship between total labor input L and population is given with this formula. The differentiated individual labor time Li is formally split into the norm time U, e.g. 8 hours per day times working days per period, and an individual factor l1, l2 … li … ln, such that Li=Uli. A value of li=0 means that the person is not in the labor force, li=1 means that the i-th worker works full-time, li=0.5 means half-time, and li greater1 means overtime. This gives the relationship between total labor input L in the axioms and total population n. The issue has been dealt with elsewhere.* You are simply ill-informed.

In sum: Nice try to filibuster away the fact that economists do NOT know until this day what profit is and that Econ 101 is axiomatically false and beyond repair.** Filibuster, though, does not help: “What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse.” (McCauley)

Whatever it is that Peter Dorman (he/him), Sandwichman and you are doing on this blog, it is NOT economics and it is NOT science.

* See blog and working papers
** For details see ‘The father of modern economics and his imbecile kids’ and 'Profit and the collective failure of economists'

May 27, 2017

What is the fuss with New Economic Thinking all about?

Comment on Barkley Rosser on ‘Fighting Zombies with Zombies’

Blog-Reference

I said: ‘It is obvious from your posts that you never had a proper understanding of what axiomatization, equilibrium, or profit is all about and in this all-inclusive scientific incompetence you are the very personification of the representative economist.’

You answered: “… I actually read your papers on why Keynesian economics is incomplete, wrong, and so on.”

So, let us see whether you understood what you read.

The whole point of axiomatization is known since J. S. Mill: “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.”

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.”

By consequence, when the premises are false the whole analytical superstructure is false even if the intermediary logical steps are all correct. This is the case with the four main approaches. From this follows that the Walrasian-Keynesian-Marxian-Austrian premises have to be fully REPLACED. This is what paradigm shift means. Because economics is a failed science the paradigm shift is the PRIMARY task for ALL economists. This is what the much touted New Economic Thinking means.

What can actually be observed, though, is that the representative economist messes up new thinking just as he messed up old thinking.

You say, the first axiom [total income is wage rate times hours worked (WL) plus dividend times number of shares (DN)] is false because there is interest, royalties, land rent etc. Yes, there are many other phenomena in the economy but this is NOT the point. The point of axiomatization is to consistently formulate the MINIMUM set of premises and then to successively derive all other economic phenomena from the axioms. It holds: “A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended is its area of applicability.” (Einstein)

Schumpeter understood this: “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. Work on this line is laying the foundations of the economics of the future.” In economics the most elementary systemic configuration is the pure production-consumption economy. So ALL of economics has to start HERE.

The immediately OBVIOUS point of the first axiom is that it does NOT state that total income is the sum of wage income and profit but that total income is the sum of wage income and DISTRIBUTED profit.

The crucial point of the first axiom is that it REPLACES the hitherto false concept of total income with the correct concept. From the first axiom then FOLLOWS profit as Qm≡DN-Sm. In methodological terms: the Profit Law follows as a theorem, profit is NOT in the axioms.

The idiocy of the representative economist consists in starting with the superficial assumption that profit is just another form of income.#1 This is dead-wrong. It is distributed profit that is just another form of income.#2 To treat profit as income is a category mistake.

The significance of the first axiom is that it brings the foundational concepts income, profit, and distributed profit in the logically correct relationship. This is something the founding fathers should have done 200+ years ago. Their inexcusable sloppiness has not been rectified by their equally incompetent heirs until this day. The first axiom is SUFFICIENT to send Walrasianism-Keynesianism-Marxianism-Austrianism directly into the scientific waste basket.

You say: “somehow he does not notice that output involves inputs besides labor.”

The second axiom replaces the unacceptable concept of a production function. The formal representation of the relationship between output, productivity and various inputs comes with the DIFFERENTIATION of the second axiom.#3 According to the methodological MINIMUM principle ― also known as Occam’s Razor ― the axioms contain ONE output and ONE input.#4

You say: “The problem is that the X or ‘quantity sold’ is completely meaningless. It is an aggregation that makes aggregating capital look like child’s play.”

Given the axioms, which refer explicitly to ONE giant firm, one has to proceed top-down by successive DIFFERENTIATION until one arrives at the individual agent. Differentiation is the OPPOSITE of bottom-up or aggregation. It is microfoundations and bottom-up that is the defining idiocy of Walrasianism, which literally PRODUCES the aggregation problem. With macrofoundations there is NO aggregation problem.

Your statement “X or ‘quantity sold’ is completely meaningless” is the ultimate proof of your illiteracy. The enumeration of the macrofoundational axioms starts with: “(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.” So X unambiguously refers to ONE firm and ONE product and is NOT an aggregate.

Economics is a failed science because economists are incompetent scientists. Their lethal blunder consists in the Fallacy of Insufficient Abstraction. The old sloppy micro-thinking of the representative economist has, for all to see, finally crashed against the wall at the end of the cul-de-sac. New thinking requires first of all the replacement of the PREMISES of the old thinking. As Hutchison put it: “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.”

The axiomatic foundations of economics are false since 200+ years. The representative economist has proved beyond doubt that he is incapable of thinking, so new thinking is forever beyond his means. NOT ONE of Barkley Rosser’s arguments holds water.

New Economic Thinking starts with a new axiom set or it is just another futile variant of the same old proto-scientific Walrasian-Keynesian-Marxian-Austrian-Rosserian garbage. The methodological rule of New Economic Thinking is: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 See ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#2 For the correct treatment of interest, land rent, and nonmonetary profit see the papers on SSRN.
#3 See Section 4 of ‘Matter Matters: Productivity, Profit, and Non-Marginal Factor Prices
#4 For the introduction of capital see ‘Squaring the Investment Cycle

Immediately preceding 'Productivity and the zombie apocalypse'


Related 'New economic thinking, or, let’s put lipstick on the dead pig' and 'The thinking economist' and 'Smart young empirically-minded economists: another vain hope' and 'The stupidity of Heterodoxy is the life insurance of Orthodoxy' and 'Media-fake-farce-fraud-storytelling-macro' and 'Economics between cargo cult, farce, and fraud' and 'Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist'

Immediately following 'First Lecture in New Economic Thinking'

May 25, 2017

Productivity and the zombie apocalypse

Comment on Sandwichman on ‘Fighting Zombies with Zombies’

Blog-Reference

You quote: “The conclusion is inevitable: there is no mechanism within the framework of rational economic analysis that, in any situation, would secure the full absorption of displaced workers and render ‘permanent’ technological unemployment in any sense impossible.”

This sentence is only true insofar as the ‘frameworks of rational economic analysis’ is defective. The elementary version of the CORRECT objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia.

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (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.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

From this follows that if rhoF is kept constant employment is kept constant. In other words, if the wage rate rises with the same rate as productivity employment is kept constant no matter what the rate of technical progress is. Alternatively, the price must fall, otherwise employment declines.

Unfortunately, the price mechanism DESTABILIZES the economy. The sequence is as follows: productivity up - rhoF down - employment down - wage rate down - rhoF down - employment down - and so on. In other words, the market economy is inherently unstable. The core claim of equilibrium economics is provable false. Standard employment theory is false since 200+ years.

Egmont Kakarot-Handtke

***
REPLY to Barkley Rosser on May 26

You say: “I have not made too big of a deal about this, although I have mentioned it, but in fact your claim that all those schools of economic thought accept the axioms you say are false and use equilibrium analysis is simply false.”

Your attention span seems to be shorter than that of a fruit fly. What I said is this (and you can google it):

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

(ii) The WALRASIAN axiom set is given by: “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) Or, as Krugman 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”.

(iii) Every model/theory that applies just one of the axioms HC1 to HC5 is false.

(iv) The other approaches are built on OTHER foundational propositions. These alternative approaches are also PROVABLE false albeit for OTHER specific reasons.

(v) The Keynesian and Post Keynesian axioms = macrofoundations are false. The proof has been given elsewhere.*

Conclusion: The four main approaches are built on DIFFERENT sets of foundational propositions. Walrasianism is defined by microfoundations, Keynesianism is defined by macrofoundations. Not only these two approaches, but ALL four approaches are axiomatically false. The COMMON defect of Walrasianism, Keynesianism, Marxianism, Austrianism is that profit is ill-defined. Economics is a failed science.

The question of equilibrium is a sub-issue because it figures prominently in the Walrasian set as axiom HC5. HC5 is a petitio principii, i.e. a methodologically inadmissible axiom.

Because equilibrium is a NONENTITY, ALL equilibrium models fly out of the window, no matter whether they are Walrasian or Keynesian equilibrium models. From the fact that equilibrium is a NONENTITY follows logically that disequilibrium, too, is a NONENTITY. Because of this, all disequilibrium models, too, fly out of the window. The economy is an evolving system and neither the concept of equilibrium nor disequilibrium is applicable.

It is obvious from your posts that you never had a proper understanding of what axiomatization, equilibrium, or profit is all about and in this all-inclusive scientific incompetence you are the very personification of the representative economist.

* See ‘Keynes’s Missing Axioms’ and ‘Why Post Keynesianism Is Not Yet a Science’ and ‘How Keynes got macro wrong and Allais got it right

Immediately following 'What is the fuss with New Economic Thinking all about?'

May 24, 2017

Full employment: thinking like the macro-boss

Comment on Sandwichman on ‘Output Optimum and the Roller Coaster of Immiseration’

Blog-Reference

The lethal mistake of your analysis of optimal employment/output is that it is partial. This mistake is widespread and ancient, so let us call this the Marshall Fallacy.

Marshallians are methodologically committed to microfoundations, that is, to the perspective of the individual firm owner. This is the wrong perspective for dealing with the employment of the economy as a whole. So the first methodological thing to do is to let the micro-boss go and to switch to the perspective of the macro-boss. In other words, the economy consist of one firm, you are the boss and you are supposed to determine employment and output, such that the firm can exist in future periods.

Accordingly, your parameters are defined with this axiom set:
(0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(i) Yw=WL wage income Yw is equal to wage rate W times working hours L,
(ii) O=RL output O is equal to productivity R times working hours L,
(iii) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These premises define the pure production-consumption economy, they are certain, true, and primary, and therefore satisfy all methodological requirements. The graphical representation is given on Wikimedia.

At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e. C=Yw and market clearing, i.e. X=O. Note that the ray in the southeastern quadrant is NOT a linear production function; the ray tracks ANY underlying production function. Note also that the wage rate W is an AVERAGE if the individual wage rates are different among the employees, which is normally the case.

Under the conditions of market clearing and budget balancing in each period the price is given by P=W/R (1), i.e. the market clearing price is always equal to unit wage costs. This is the MOST ELEMENTARY form of the price theorem also called LAW OF SUPPLY AND DEMAND.

If the wage rate W is lowered, the market clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price P rises. If productivity increases the price falls. In any case, labor gets the whole product, the real wage W/P is invariably equal to the productivity R according to (1), and profit for the business sector as a whole is zero. All changes in the system are reflected by the market clearing price. The elementary market economy is indefinitely reproducible under the condition of no external/physical limitations like space, raw materials etcetera, which ALL have to be introduced later in the course of an ever more detailed analysis.

This has been the first step. With the second step the conditions of market clearing and budget balancing have to be lifted. This GENERALIZATION produces the phenomena of inventory changes (O-X greater than 0 or less than 0) and of saving/dissaving (Sm≡Yw-C greater than 0 or less than 0) and of monetary profit/loss (Qm≡C-Yw greater than 0 or less than 0).

It always holds Qm+Sm=0 or Qm=-Sm, in other words, the business sector’s surplus (deficit) equals the household sector’s deficit (surplus). Profit is the counterpart of dissaving and loss is the counterpart of saving. This is the most elementary form of the PROFIT LAW. Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, or the smartness of the macro-boss. Overall profit/loss is determined by the change of the household sector’s debt.

Given the axioms (0) to (iii) one has to proceed top-down by successive DIFFERENTIATION until one arrives at the INDIVIDUAL agent. Differentiation is the opposite of bottom-up or aggregation.

The first thing to notice is that the macro-boss can realize any level of employment L under the condition of market-clearing and budget balancing. The macro-boss is indifferent with regard to the employment level because monetary profit Qm is zero at all employment levels. The real wage is given with W/P=R (1) and to simplify matters here it is assumed that the productivity R is equal on all levels of employment.

Now, total employment is given as the sum over the number n of workers L= L1+ ... +Li+ ... +Ln. The individual labor time can be formally split into the norm time U, e.g. 8 hours per day times working days per period, and an individual factor l1, l2 etc. such that Li=Uli. A value of li=1 means that the i-th worker works full-time, li=0.5 means half-time, and li greater1 means overtime. This gives the relationship between total labor input L, the number of workers n and individual labor input li as shown on Wikimedia.

The macro-boss is indifferent between all employment levels L and (practical organizational problems put aside for the moment) as a matter of principle also indifferent between the possible combinations of number of workers n and individual labor time Li. So, to begin with, there is NO optimization problem only an organizational problem.

Conclusion: In the pure production-consumption economy with market clearing and budget balancing the real wage is determined by the actual production conditions. Given the productivity (= real wage), each worker chooses his individual input factor li which is equal or less than 1. The norm time U is defined by law according to average health standards. The macro-boss is indifferent between all levels of employment L and all combinations of n, U, li. As a result, there is NO conflict between labor and the macro-boss with regard to the realization of full employment.

Egmont Kakarot-Handtke

***
REPLY to Sandwichman, Blissex on May 25

There are concepts which are both economic and measurable, e.g. wage rate, labor time, output, price, consumption expenditures, profit etc. It seems to be a rather straightforward idea for economists to show how their foundational concepts are logically interrelated. This is the very precondition of coherent talk about the economy. It is a fact, though, that economists have not managed to define their basic concepts consistently. In marked contrast, every physics student knows how the basic concepts of their subject matter, e.g. mass, force, energy, velocity, acceleration, fit logically together and relate to reality.

As a result, we have after 200+ years of brain-dead blather that neither Walrasians, Keynesians, Marxians, Austrians nor Pluralists have any idea what profit is and how the price- and profit mechanism works. Not only this, the know-nothings of economics pester the world with economic policy proposals.

You, for example, talk about immiseration and that ‘the farm is run for the benefit of farmers’. What do you think that this is? Economics?

It is pretty obvious that whatever this is, it is NOT economics. Hence the title of this blog is misleading. What is taking place here is pollution of the scientific atmosphere and severe damage of the intellectual/spiritual environment. The time has come to stop this.

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Answer of an EconoSpeak admin


This comment has been removed by a blog administrator.

May 22, 2017

Economics is NOT about Human Nature but the economic system

Comment on Bill Mitchell on ‘Humans are intrinsically anti neo-liberal’

Blog-Reference and Blog-Reference

For little children the primary layer of reality is the social here-and-now ― mom, pop, family and neighborhood. The insight that the tiny social bubble is embedded in the non-social reality of region, earth, universe and their past and future development commes latter. Most people do not get far beyond the infantile layer of reality: “Perhaps it is because their horizons are limited in this way that some people are able to imagine that the centre of the universe is man.” (Feynman)

In the myopic Human-centered worldview learning and knowledge relates primarily to the properties/motives/behavior/actions of other humans. In the Universe-centered worldview learning and knowledge relates primarily to the properties/‘behavior’ of Non-human Nature. In very general terms, this gives us two fundamentally different realms: politics and science. It is of utmost importance to keep both realms separated because they are governed by mutually exclusive principles. The accepted currency in the political realm is opinion (= doxa), the accepted currency in the scientific realm is knowledge (= episteme).

In economics the proper separation never took place. There have always been two economixes, political economics 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 (= true theory). (ii) In political economics anything goes; in theoretical economics scientific standards are observed. Fact is that (i) theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers), and (ii), political economics has produced NOTHING of scientific value in the last 200+ years.

The underlying world view of political economics is, of course, Human-centered. Accordingly, the issues have been folk psychological, folk sociological and folk biological: self-interest, greed, utility maximization, profit maximization, rent seeking, moral hazard, bounded rationality, animal spirits, honesty/trust/corruption, power/freedom/oppression, individualism/collectivism, competition/cooperation, survival of the fittest and so on.

ALL definitions of economics implicitly or explicitly contain a Human-Nature core.

“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)

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

“The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.” (Mill)

It is pretty obvious that the common denominator of the different schools of economics is Human-centric. This is the ultimate axiom of economics and this defines it as so-called social science. Where the schools differ is what the true Human Nature is or should be.

It is also pretty obvious that ALL definitions of economics contain the commitment to science.

Fact is, though, that economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and ALL got the pivotal economic concept profit wrong.#1 After 200+ years economics is still at the level of a proto-science or what Feynman called a cargo cult science.

What neither orthodox nor heterodox economists have realized is that their definition of the subject matter is methodologically unacceptable. All Human-Nature issues are the subject matter of other disciplines, that is, of psychology, sociology, political science, anthropology, biology etcetera. The subject matter of economics is the structure/ ‘behavior’ of the economic system, which is an objective non-human entity. The outstanding characteristic of the representative economist is that he dabbles since 200+ years in all Human-Nature disciplines but has NO idea how the economic system works. Fact is that the representative economist does not even know what profit is.#2

Because economic theory has NEVER been true, economic policy guidance NEVER had sound scientific foundations. The scientific incompetence of economists consists in the fact that they have defined economics as a so-called social science instead of a system science and that they have not realized their fundamental methodological blunder until this day.#3 Since Adam Smith/Karl Marx economics is political economics and ALL political economics is scientifically worthless.

Egmont Kakarot-Handtke

#1 Including MMT see ‘Where MMT got macro wrong
#2 See ‘Essentials of Constructive Heterodoxy: Profit
#3 See also ‘The Science-of-Man fallacy


For details of the bigger picture see cross-references Not a science of behavior

***
COMMENT on Tom Hickey on May 23

You say: “Training children in this is part of the socialization process, and those that don't get become life-long brats that are always taking and never give, or when they give it is not really reciprocating. They get a reputation for being assholes.”

This is a fine piece of folk psychology/sociology. The questions is, is it relevant for economics? Not at all! The insight that there are assholes in the world ― to which everybody can readily agree from his own experience ― does NOT advance our understanding of how the actual economy works. Just the opposite. Psychology/sociology are NOT the subject matter of economics but a distraction from the real issues, which, as we all know by now, has led economics into the coal-pit of cargo cult science.#1

Keynes, famously, gave a definition of what the centerpiece of economics is: the monetary theory of production. Note, that this definition of the subject matter eliminates a lot of garbage that has always been dear to mentally retarded economists. Barter, for example. But, more important, it eliminates ALL psychological and sociological issues. In contradistinction to the neoclassical utility maximizers, Keynes correctly defined economics as a system science.

In order not to fall back behind Keynes the PsySoc-Ban has to be issued as one of the Ten Commandments of Economics: Leave all psychological, sociological, anthropological, biological etc. issues to psychology, sociology, anthropology, biology etc.

The PsySoc-Ban has tremendous consequences because standard economics is built upon this set of behavioral 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 PsySoc-Ban bans the neoclassical approach from economics ― completely from supply-demand-equilibrium to DSGE. So, there is absolutely NO need to reenact Groundhog Day and to moralize again and again about constrained optimization, greed or individualism.

The PsySoc-Ban, though, has one important methodological implication: “The problem is not just to say that something might be wrong, but to replace it by something ― and that is not so easy.” (Feynman)

So, the all-decisive question is: is MMT the replacement of obsolete neoclassical economics?

No! MMT, just like PsySoc standard economics, is axiomatically false.#2 Which brings us to the question, why does Bill Mitchell waste so much time with kicking a dead horse instead of correcting the provable false formal foundations of MMT?

#1 “... 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.” (Hume)
#2 See also ‘Going beyond Wicksell, Keynes and MMT

May 20, 2017

Getting out of the economics swamp

Comment on Noah Smith on ‘Vast literatures as mud moats’

Blog-Reference and Blog-Reference adapted to context

You say: “The point is, a bunch of smart people can get very big things wrong for a very long period of time, and that period of time may include the present.”

True, this happened with Geo-centrism for roughly 1500 years starting with the smart mathematician, astronomer and geographer Ptolemy around 100 AD. It happened again with economics, starting 200+ years ago with the not so smart Adam Smith. As a result it holds for economics in general “the vast literature actually contains more misinformation than information.”

The situation in economics is special insofar as there are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics scientific standards are observed.

Political economics as a whole is scientifically worthless. The proper place for this “vast literature” is the waste basket. Political economics is easily recognizable by its swampiness. Swampiness is what what Popper called an immunizing stratagem because: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman) Therefore, the political economist is mainly occupied with producing a methodological smoke screen that consists of vague concepts, anything goes, pluralism of false theories, alleged complexity, ontological uncertainty, unreliable data, the faux humility of ‘I know that I know nothing’, and the post-modern replacement of true theory by an emotional narrative.#1

The beauty of the swamp ‘where nothing is clear and everything is possible’ (Keynes) is that logical and empirical failure is inconsequential.#2 What you call the mud moat has indeed saved the life of the representative economist since 200+ years.

The other part of the “crappy vast literature” consists of methodological blunder, i.e. stuff that does not satisfy the scientific criteria of material and formal consistency. This holds for everything that comes under the banner of Walrasianism, Keynesianism, Marxianism, Austrianism and Pluralism. These approaches are mutually contradictory, axiomatically false, materially/formally inconsistent and ALL got the pivotal economic concept profit wrong.

There are the hard rocks of true or false and the swamp between them. The swamp is the natural habitat of agenda pushers, confused confusers, incompetent scientists, political economists, status-quo inertionalist, commonsensers, and anti-scientists. The very characteristic of science is to relentlessly drive the question under discussion to the point of a clear-cut decision between true or false, in other words, to get out of the swamp: “We are lost in a swamp, the morass of our ignorance. … We have to find the roots and get ourselves out! … Braids or bootstraps are necessary for two purposes: to pull ourselves out of the swamp and, afterwards, to keep our bits an pieces together in an orderly fashion.” (Schmiechen)

The braids or bootstraps of science are material and formal consistency. Formal consistency is established by the axiomatic-deductive method, material consistency by state-of-the-art testing.

The very characteristic of economics is that the “vast literature” consists of inconsistent and inconclusive blather or politics dressed up as science. So, perhaps 90 percent of the content of peer-reviewed quality journals consists of models/theories that are axiomatically false. Axiomatically false means based on false Walrasian microfoundations or false Keynesian macrofoundations or ad hoc plucked out of thin air. Therefore, the one and only interesting question in the given situation is how to achieve the paradigm shift from defective micro- and macrofoundations to materially and formally consistent macrofoundations.#3

Accordingly, the straightforward criterion for disposing the “crappy vast literature” speedily into the waste basket is: If it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 See also ‘What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 The political economist and incompetent scientist Keynes was one of the loudest defenders of conceptual vagueness: “Another danger is that you may ‘precise everything away’ and be left with only a comparative poverty of meaning. ... Such a problem was avoided, said Keynes, by Marshall who used loose definitions but allowed the reader to infer his meaning from ‘the richness of context’.” (Coates)
#3 See ‘True macrofoundations: the reset of economics

***
REPLY to Barkley Rosser & other swampies on May 21

Noah Smith’s post has been titled “Vast literatures as mud moats” and deals with the use of cargo cult science for agenda pushing. Mud moats is just another term for the phenomenon which I call swampiness.

Noah Smith’s argument does not only apply to the production of scientifically worthless papers but a fortiori to blog posts.#1 It is pretty obvious that EconoSpeak is in the business of swampification. The proof is in Barkley Rosser’s recent posts about Trump, Putin, populism etcetera which do not contain one single atom of valid economics.

When Barkley Rosser occasionally turns to economics, swampiness goes into hyper-drive. To recall, Noah Smith’s argument has been: “If you and your buddies have a political argument, a vast literature can help you defend your argument even if it’s filled with vague theory, sloppy bad empirics, arguments from authority, and other crap.”

This is the actual situation in economics: economic policy arguments and proposals have NO sound scientific foundation. How does Barkley Rosser counter this argument which applies to Walrasianism, Keynesianism, Marxianism, Austrianism and Pluralism alike? With the recommendation to read good review essays. This is off the point like recommending not to drink leaded water but to take the lead in the more convenient pill form.

Good review essays, of course, are NOT the way to get rid of the “crappy vast literature” that has been produced by incompetent scientists and agenda pushers. Good review essays only preserve the swamp. Harcourt’s review of the capital controversy is a case in point.

The ambition of science is, of course, to drain the swamp of mere opinion and to eventually reach the firm ground of true theory. Lifelong swampies who see their natural habitat in jeopardy quite naturally defend it.#2 This is why Walrasians, Keynesians, Marxians, Austrians are currently so busy with producing even more mud in the econoblogosphere. Barkley Rosser and his buddies in their utter scientific incompetence are setting up new records in mud production.

#1 See ‘Feynman Integrity, fake science and the econoblogosphere
#2 See ‘Failed economics: The losers’ long list of lame excuses

May 19, 2017

The equilibrium of idiocy

Comment on Peter Radford on ‘Equilibrium: a weed to pull’

Blog-Reference

Peter Radford maintains: “There are silly things in economics that need to be weeded out, so that something better can emerge.” And then he goes on to quote Jevons and concludes: “Equilibrium is a nasty weed. It clutters up our garden. It distracts us from reality. Rip it out!”

All this is trivially true except for the crucial snag: Jevons published The Theory of Political Economy in 1871. Time enough, one would think, for Heterodoxy to rip equilibrium out. However, like all his heterodox predecessors since Veblen, Peter Radford somehow seems incapable of doing the job himself.

Merely criticizing Orthodoxy does not make it to go away: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

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

But construction NEVER happened. Standard economics since Jevons/Walras/Menger is built upon these 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)

Every sober person who takes a deep breath and then reads the Walrasian axioms carefully one by one comes to the conclusion that the whole set, and not only equilibrium, is proto-scientific garbage. This raises three questions for the future researchers of the history of economic thought:
(i) How could it happen that the vast majority of economists adhered 140+ years to a set of axioms that had already been dead in the cradle?
(ii) How could it happen that Heterodoxy never replaced the patently defective Walrasian axiom set with something better?
(iii) How could it happen that economists have not simply been fired or jailed for falsely claiming that they are doing science?

After all, in view of the fact that the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/ formally inconsistent the claim as expressed in the title: “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is untenable.#2 Economics cannot be admitted to the sciences ― neither orthodox nor heterodox economics.

Orthodox economics is proto-scientific rubbish. What is needed since Jevons/Walras/ Menger is a paradigm shift. By not fully replacing the orthodox axiom set but pleading for pluralism, which is nothing else than the pluralism of false theories, Heterodoxy has failed at its very task and become integral part of one of the greatest scientific failures of all times.#3

Egmont Kakarot-Handtke

#1 See ‘The prime primer on equilibrium
#2 See ‘The real problem with the economics Nobel
#3 For the bigger picture see cross-references Heterodoxy

May 18, 2017

Math, Einstein, and the bottomless incompetence of economists

Comment on Lars Syll on ‘The laws of mathematics and economics’

Blog-Reference and Blog-Reference on May 22

In order to reinforce his critique “of the overly debonair attitude with which mathematics is applied to economics” Lars Syll refers to a well-known Einstein quote which reads: “In my opinion the answer to this question is, briefly, this: “As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.” (1921)

From the last part of the quote seems to follow that the laws of mathematics are ‘certain’ when ‘they do not refer to reality.’ Reality, though, as everbody knows, is uncertain, hence mathematics, as a matter of principle, misses reality. And therefore it is not only useless in economics but misleading. So, because reality is uncertain it is vagueness that captures reality. This is the methodological gospel of the Cambridge School of Loose Verbal Reasoning since Marshall.

“From his discussions with Wittgenstein, Keynes was well aware of the significance of vague concepts and the possible trade-off between precision and accuracy: This led him to conclude that formalization runs the risk of leaving behind the subject matter we are interested in.” (Coates)

Keynes dismissed formal precision and praised the magic of vagueness: “Theories constructed with vague concepts paradoxically can maximize precision and economy.” (Coates). As a result: “For Keynes as for Post Keynesians the guiding motto is ‘it is better to be roughly right than precisely wrong!’” (Davidson)

It seems that Einstein supports what became Post-Keynesian and heterodox methodology. But let us read the full quote again. What exactly was the question Einstein was answering? It was this: “At this point an enigma presents itself which in all ages has agitated inquiring minds. How can it be that mathematics, being after all a product of human thought which is independent of experience, is so admirably appropriate to the objects of reality?”

Oops, that is a bit surprising, now mathematics captures reality admirably. Einstein does not support Lars Syll’s interpretation? NOT AT ALL. Here, Einstein clarifies the puzzling relationship between the axiomatic-deductive method and reality: “It is clear that the system of concepts of axiomatic geometry alone cannot make any assertions as to the relations of real objects of this kind, which we will call practically-rigid bodies. To be able to make such assertions, geometry must be stripped of its merely logical-formal character by the co-ordination of real objects of experience with the empty conceptual frame-work of axiomatic geometry. To accomplish this, we need only add the proposition:—Solid bodies are related, with respect to their possible dispositions, as are bodies in Euclidean geometry of three dimensions. Then the propositions of Euclid contain affirmations as to the relations of practically-rigid bodies.”

In other words: “Formal axiomatic systems must be interpreted in some domain ... to become an empirical science.” (Boylan et al.)

What is the domain of economics? The accustomed definition is: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins)

The key words are human behavior. But wait, the study of human behavior is the domain of psychology/sociology/anthropology etcetera. The domain of economics is fundamentally different from the so-called social sciences. Therefore Robbins’s definition must change to: Economics is the science which studies how the actual economic system works.

The economic system is something objective that follows its own structural laws. In the system’s behavior there is no vagueness and uncertainty. It is humans that are the randomizers.

The inexcusable methodological dilettantism of Orthodoxy does NOT consist in the application of the axiomatic-deductive method but in the postulation of BEHAVIORAL axioms. Who, except generations of economists, would ever accept utility maximization as an axiom and formalize utility which is a NONENTITY just like the Easter Buny or Spiderman? To paraphrase Einstein: An enigma presents itself which in all ages has agitated inquiring minds.

Of course, everbody knows the answer by now: It is scientific incompetence that explains the failure of both orthodox and heterodox economics. Neither managed to put math to good use for the advancement of economics.

Egmont Kakarot-Handtke


Related 'Getting out of the economics swamp' and 'Make econ true' and 'Economics’ lack of scientific legitimacy'  and for the bigger methodological picture see cross-references Math/Mathiness

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REPLY to Huw Williams on May 22

You say: “The statement that ‘The economic system is something objective that follows its own structural laws’ is only true if you can show what those laws are and that the system actually follows them.”

This, of course, is the whole point.

The elementary structural law of economics is shown on Wikimedia.#1 It consists of measurable variables. From this First Economic Law follows the Profit Law#2, the Law of Supply and Demand #3 and after progressive differentiation the employment equation, which is readily testable.#4

#1 Wikimedia, First Economic Law
#2 Wikimedia, Profit Law
#3 Wikimedia, Law of Supply and Demand
#4 See cross-references Employment

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REPLY to robert locke on May 23

The true theory is the humanly best mental representation of reality. Truth is well-defined by material and formal consistency: “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)

You say: “The economic system does not exist outside the human mind.” This is a senseless statement comparable to: “The Helio-centric system, which is a mental construct, does not exist outside the human mind.”

The most elementary version of the economic system is the pure production-consumption economy. It can be captured by one equation.* The equation consists of measurable variables, so it can be checked against reality just like the law of gravitation can be checked against reality.

Both, neoclassical and Keynesian theory has no counterpart in reality. They exist only in the confused minds of economists. Insofar you are right, but as everybody knows, economics is a failed science because economists are incompetent. In general it holds that science is the best mental representation of reality.

* Wikimedia, The First Economic Law

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COMMENT on Ken Zimmerman on May 25

You quote your mathematics professor as writing: ”Two points of interest from that book. First, how did Descartes create the notion to mathematize everything and call it a unified method for science? The answer: as the result of a psychotic dream, or series of dreams.”

Note that the question is whether what Descartes said about mathematics is true or false and NOT how he got the idea. As Schumpeter put it: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

Psychologism, i.e. imputing a motive as explanation for some phenomenon, is the preferred mode of morons to explain the world. Freud started this popular pastime with delivering an assortment of complexes, mostly taken from Greek mythology. Mirowski then continued this bunkum by importing penis envy as physics envy into economics.

In the same vein Susan Feiner comments: “The Flight to Objectivity, Susan Bordo, makes a strong feminist case that ‘objectivity’ ala Cartesian world view is a psychological attempt to contain & order the massive anxiety produced by the reams of new knowledge challenging Catholic orthodoxies about natur, power, right.”

Isn’t it amazing that psychologism has an easy explanation for everything? And isn’t it amazing that psychologists have never heard of Popper’s methodological dictum that a theory that explains everything explains nothing.

Second-guessing other people’s motives is NOT science for the simple reason that there is NO WAY to determine whether the guess is true or false. As a matter of principle, scientists do not touch questions like Had Adam a navel? or How many angels can dance on a pinpoint? because they know that there is NO WAY to determine the truth content of these statements.

Second-guessing other people’s motives is a no-go in the realm of science but the main occupation in the realm of politics. Politics is the intellectual swamp where ‘nothing is clear and everything is possible’ (Keynes) and where anything goes.

Social sciences is an oxymoron because, as Feynman showed, the so-called social sciences are in fact cargo cult sciences. “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 in the so-called social sciences is scientific competence. And the incompetence is clearly visible in the treatment of mathematics. What the mathiness discussion has shown is that neither orthodox nor heterodox economists have managed to put math to good use for the advancement of economics.

What economics has first of all to do is to get out of the so-called social sciences.

There are concepts which are both economic and measurable, e.g. wage rate, labor time, output, price, consumption expenditures, profit etc. It seems to be a rather straightforward idea for economists to show how their foundational concepts are logically interrelated. This is the very precondition of coherent talk about the economy. It is a fact, though, that economists have not managed to define their basic concepts consistently.* In marked contrast, every physics student knows how the basic concepts of their subject matter, e.g. mass, force, energy, velocity, acceleration, fit logically together and relate to reality. Economists do not even know what profit is.

It is NOT physics envy to insist that economists define their basic concepts consistently. And it is NOT the result of a psychotic dream to insist that economists satisfy the criteria of scientific truth, i.e. material and formal consistency. It is orthodox and heterodox economics that is a proto-scientific neurotic nightmare.

You say: “Mathematical social sciences, including economics, is a bad idea!” Yes, but materially and formally consistent economics is a good idea.

The ambition of science is to drain the swamp of mere opinion, inconclusive blather, psychologism, sociologism, loose verbal reasoning, gossip, storytelling etc. and to eventually reach the firm ground of true theory. Lifelong swampies who see their natural habitat in jeopardy quite naturally cannot find any merit in this idea. No psychological surpise here.

* See ‘The Profit Theory is False Since Adam Smith

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Blog capture May 26

May 16, 2017

Smart young empirically-minded economists: another vain hope

Comment on Noah Smith on ‘How should theory and evidence relate to each other?’

Blog-Reference and Blog-Reference adapted to context an Blog-Reference on May 17

Economics fits perfectly Feynman’s description of a cargo cult science: “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.”

Economics have realized that science consists of the two components theory and evidence: “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)

But, for some reason, economists do not get the two components properly together.#1 With regard to the criteria of material and formal consistency economics is a failed science.

Currently, economists are in the mode of thorough self-critique. Yes, we have done too much math, yes, there has been too much abstract model building and too little empirics, etc. But then, all this was what ‘thinking like an economist’ was meant to be: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

Economists readily admit obvious blunders. But then these are declared the faults of the old guard and now the smart young economists are on the right track. Fact is, though, that the new guard, just like the old, does not really understand what science is all about.

Science is about general and invariant features of reality. In marked contrast, history is about unique event configurations on the surface which never repeat themselves. Science abstracts from all spatio-temporal details, which are so dear to the commonsenser and realist, because NO way leads from the history of falling apples to the universal Law of Falling Bodies. Nozick defines invariance in general terms: “An objective fact is one that is invariant under all admissible transformations.”

Non-scientists and historians are glued to the ever changing surface, so they produce stories while scientists try to get hold of the underlying structure and produce laws=invariances. Economists are dimly aware of this: “That’s a good reason to want a good structural model.” (Noah Smith)

The lethal defect of economics is that it is microfounded, i.e. based on behavioral axioms.#2 Now it holds that (i) there is NO such thing as an invariant of human behavior, and (ii), NO way leads from the explanation of human nature/behavior/action to the explanation of how the economic system works.

Economics is NOT AT ALL about human behavior, this is the subject matter of psychology, sociology, anthropology, biology, political science, etc., but about the behavior of the economic system. By consequence, economics has to be macrofounded.#3

Economics has to step down as fake Queen of the so-called social sciences in order to eventually become a honorable member of the system sciences. This paradigm shift, clearly, is beyond the means of Noah Smith’s ‘smart young empirically-minded economists’.

Egmont Kakarot-Handtke

#1 See ‘What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 See also ‘The happy end of the social science delusion
#3 See ‘True macrofoundations: the reset of economics


Related 'What is REALLY wrong with macro' and 'Does Asad Zaman fly with POL or SCI Airlines?' and 'Macro imbeciles' and 'From the pluralism of false models to the true economic theory'

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COMMENT on GW on May 17

You say: “I’d recommend closely reading and translating Blanchard’s ”

That is not such a good idea. Blanchard, too, is in deep methodological confusion. For details see:
From the pluralism of false models to the true economic theory
Eclecticism, anything goes, and the pluralism of false theories
Getting out of IS-LM = Getting out of despair