June 29, 2017

Economists: scientists or political clowns?

Comment on Barkley Rosser on ‘Comments on Profit and Capital’

Blog-Reference

If you do not like Desai’s assessment of theoretical economics take Mirowski’s: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” Or take Wood: “Profit is a subject to which economists have addressed themselves for at least two hundred years, but without much success. For there is at the moment no general theory of profits which commands anything approaching universal acceptance either among academic economists or among men of affairs.” Or take Obrinsky: “Nor do the modern variants add anything whatever on this score. For Debreu profits are simply a nonissue, while Arrow and Hahn make only passing reference to profits ― and that only as a historical introduction. Whatever may be the usefulness of these idealized theoretical constructs, they cannot be said to throw any light on the profit issue; surely, therefore, they fail to capture the essence of a capitalist market economy.”

Repeat: The representative economist fails until this day to capture the essence of a capitalist market economy. And these scientific nullities dare to open their mouths and to give economic policy advice.

Your question “You think that Desai agrees with you and supports your views” is entirely beside the point. The only question is this: is the structural-systemic-macro Profit Law true or false, with truth defined as formal and and material consistency. Scientific truth is NOT established by an opinion poll among economists.

The structural-systemic-macro Profit Law consists of measurable variables and is readily testable. There is no need at all to second-guess what commonsensers think about it, just as there is not need to second-guess what commonsensers think about the Law of the Lever. Everybody who thinks the structural-systemic-macro Profit Law is false can try to logically/empirically refute it. This is how science works. Only proof counts.

The opinion of commonsensers is traditionally the last thing a scientist is interested in: “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.” (Mill)

What commonsensers or myopic capitalists and workers or incompetent economists hallucinate about profit is scientifically irrelevant. Overall monetary profit is given with Qm=-Sm in the most elementary case. This tiny formula turns whole economic libraries into waste paper.

You say about the heap of crappy profit theories: “That is my view. All of them have some degree of truth to them, all of them see different aspects, but indeed none of them are fully satisfactory.” It is a well-known fact that all false theories, including the flat earth theory, have “some truth” to them. Some truth is the same thing as worthless commonsensical plausibility which is the very opposite of scientific truth.

You will never hear a scientist saying: we have numerous concepts of energy and “all of them have some degree of truth to them”.

This is the defining difference between a cargo cult scientist and a scientist: the former tries to keep everything in the swamp of wish-wash where ‘nothing is clear and everything is possible’ (Keynes). A scientist drives every question to a final clear-cut true/false decision. This is what rigorous means and this is what all blatherers and storytellers and swamp creatures abhor and denounce most.

The pluralism of false profit theories has always been and will always be scientifically indefensible. Barkley Rosser’s methodologically confused anything-goes wish-wash is self-disqualifying.

The main issue of this thread is profit and not capital and not distribution. It should be immediately clear that traditional distribution theory falls apart because the underlying profit theory is provable false. So, there is absolutely no need to deal here in any detail with the marginal theory of distribution (the second-worst construct right after supply-demand-equilibrium) or with Piketty.*

The profit theory is false since Adam Smith. Whether the representative economist understands the unassailable mathematical proof and its vast implications is a matter of indifference. The representative economist has always been out of science and will never be admitted to it. Not to know what profit is, is scientifically lethal to an economist and degrades him to a clown in the political Circus Maximus. Barkley Rosser is a living example.

Egmont Kakarot-Handtke

* For more details about these issues see
Non-existence of economic science
A particularly silly critique
The universal Profit Law and the multitude of unique historical circumstances
First Fundamental Law vs. Fundamental theorem of income distribution
The profit theory is false since Adam Smith. What can you expect from distribution theory?
Economic policy has gone wrong because economic theory has gone wrong


Immediately preceding 'Profit and stupidity'

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REPLY to Barkley Rosser on Jun 30

There are TWO issues:
(i) Desai, Mirowski, Wood, Obrinsky, you and I agree that the profit theory is false since 200+ years, that is, the representative economist fails until this day to capture the essence of a capitalist market economy.
(ii) Whether the elementary objective-structural-systemic-behaviorfree-macro Profit Law, i.e. Qm=-Sm, is scientifically true, i.e. materially and formally consistent.

Let us be content with the agreement on (i) and not get distracted by (ii). From (i) follows: the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent,#1 and ALL got profit wrong. With the pluralism of provable false theories economics sits squarely at the proto-scientific level. Economics is NOT a science and neither orthodox nor heterodox economists qualify as scientists.#2

#1 “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)
#2 See also ‘Economics: 200+ years of scientific incompetence and fraud

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REPLY to Barkley Rosser on Jun 30

Isn’t it curious that in economics NOT ONE of the basic concepts ― profit, income, capital, money, etcetera ― is properly defined. A fact that did not escape the notice of von Neumann: “I think it is the lack of quite sharply defined concepts that the main difficulty lies, and not in any intrinsic difference between the fields of economics and other sciences.”

Needless to emphasize that economists have an explanation=excuse for their failure in general and in every particular case.#1 The Pavlovian argument is that in “other sciences”, too, things are not defined precisely (meteorology, biology, psychology etcetera). Stupid as they are, economists have never realized that with these excuses they catapult themselves out of science. Feynman has killed this silly argument long ago: “By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.”

Rule #1: When you cannot define your subject matter precisely you are a priori OUT of science. This applies to the so-called social sciences which Feynman re-categorized as cargo cult sciences. And this is why economics has to be re-defined as system science.

This is the current state of economics: “economists cannot claim to know anything about it” or as Clower put it: “... 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.” What has been produced instead of scientific knowledge is endless blather, political hot air, folk philosophy=utilitarianism, folk psychology, folk sociology, silly semantic games, sitcom stories and white noise.

Ask an economist what profit is and you get these answers: Smith: Wages, profit , and rent, are the three original sources of all revenue as well as of all exchangeable value. Ricardo: … profits would be high or low in proportion as wages were low or high. Senior: In the second class we have the words Capital, Capitalist, and Profit. These terms express the instrument, the person who employs or exercises it, and his remuneration; but there is no familiar term to express the act, the conduct of which profit is the reward, and which bears the same relation to profit which labour does to wages. To this conduct we have already given the name of Abstinence. Mill: The cause of profit is, that labour produces more than is required for its support. Marx: Hence, if a commodity is sold at its value, a profit is realized, which is equal to the excess of its value over its cost-price, or equal to the entire surplus-value incorporated in the value of the commodity. Jevons: I think that in the equation Produce=profit+wages, the quantity of produce is essentially variable, and that profit is the part to be first determined. Marshall: The normal earnings of management are of course high in proportion to the capital, and therefore the rate of profits per annum on the capital is high, when the work of management is heavy in proportion to the capital. Knight: The presence of true profit, therefore, depends on an absolute uncertainty in the estimation of the value of judgment, or on the absence of the requisite organization for combining a sufficient number of instances to secure certainty through consolidation. Schumpeter: And since the new combinations which are carried out if there is ‘development’ are necessarily more advantageous than the old, total receipts must in this case be greater than total costs. von Mises: The ultimate source from which entrepreneurial profit and losses are derived is the uncertainty of the future constellation of demand and supply. Keynes: Thus the factor cost and the entrepreneur’s profit make up, between them, what we shall define as the total income resulting from the employment given by the entrepreneur. Hicks: The curve IS can therefore be drawn showing the relation between Income and interest which must be maintained in order to make saving equal to investment. Harrod: The relevant propositions may be stated in the form of truisms or tautologies, such as that the price of an article is equal to the sum of rewards to all persons contributing to its production, ... Shackle: Thus it seems that we might select decision-making and uncertainty-bearing as the economic roles to perform which men come forward because of the prize of profit in the sense we have been discussing. Samuelson: GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP. Debreu: … the consumers own the resources and control the producers. Thus, the ith consumer receives the value of his resources … and the shares … of the profit of the 1st, …, jth, …, nth producer. … Consider a private ownership economy E . When the price system is p, the jth producer tries to maximize his profit on Yj. Suppose that yj does this; the profit pj(p) = p • yj is distributed to shareholders. Arrow and Hahn: Given a set of prices for all commodities, it is possible to calculate for each activity its profit, the excess of the values of its outputs over the value of its inputs; … The assumptions of perfect competition imply that … each firm chooses an activity that yields it at least as much profit as any other possible. Kaldor: Income may be divided into two broad categories, Wages and Profits (W and P), where the wage-category comprises not only manual labour but salaries as well, and Profits the income of property owners generally, and not only of entrepreneurs; Kalecki: Gross profits = Gross private investment + Capitalists’ consumption. Sraffa: This is because the surplus (or profit) must be distributed in proportion to the means of production (or capital) advanced in each industry; and such a proportion between two aggregates of heterogeneous goods (in other words, the rate of profits) cannot be determined before we know the prices of the goods. Boland: The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. Thus, since in the short-run non-zero profit is possible, the actual short-run prices cannot always be used for aggregation. But, from the macro perspective of Walrasian general equilibrium, the total profits in this case cannot be other that zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) but this does not preclude the possibility of short-run profits and losses of individual firms canceling each other out. Minsky: The simple equation ‘profit equals investment’ is the fundamental relation for a macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure. Barro: Households receive income in four forms: profit …, wage income, rental income, and interest income. Wickens: Implicit measure of profits Πt = -kt+1 +(1+θ)kt. Ljungqvist and Sargent: In each period, the representative firm takes (rt, wt) as given, rents capital and labor from the households, and maximizes profits: Π=F(kt, nt)-rtkt-wtnt. Nadal: ... the budget constraint of consumers may be undetermined because it incorporates their share of firms’ profits, which may not be defined. Keen: … net annual income in this simple model equals the sum of wages plus profits.

ALL, repeat ALL, these authors got it wrong and nothing proves the idiocy of economists better than the endless list of provable false profit definitions.

Overall profit is with the precision of two decimal places given by the macrofounded Profit Law, which reads in the most elementary case Qm=-Sm. This formula immediately tells anyone who can read and think that the monetary economy is NOT an equilibrium system but will break down with mathematical necessity ― not because of human errors/mistakes/ misbehavior but BECAUSE of the inescapable Profit Law.

#1 See ‘Failed economics: The losers’ long list of lame excuses

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REPLY to Barkley Rosser on Jul 1

(i) The ancient Greeks introduced the distinction between opinion (= doxa) and knowledge (= episteme).

(ii) Scientific knowledge is defined by material AND formal consistency. Accordingly, refutation consists of the proof of empirical or logical inconsistency.

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

(iv) Knowledge takes the form of a materially/formally consistent theory which is the best mental representation of reality that is humanly possible.

(v) Barkley Rosser has never understood what science is all about. This, he has in common with the vast majority of economists who are 2000+ years behind the curve.

(vi) All human beings are born into an intellectual swamp. The vast majority stays there for the rest of their lives, only the tiny intellectual elite of scientists tries to get out: “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)#1

(vii) The methodological bootstraps of science are formal and material consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.

(viii) ALL profit theories since Adam Smith are logically/empirically false. Strictly speaking, this proto-scientific rubbish does not deserve the title theory. Laypeople constantly confound hypothesis (= guess, start of the process) with theory (= truth, end of the process). Profit theory never rose above the guessing stage.#2

(ix) There is only ONE true theory. The pluralism of false theories is scientifically indefensible: “It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend)

(x) In their defense of the comfort zone of stupidity ‘where nothing is clear and everything is possible’ (Keynes) swampies regularly invoke Heisenberg’s uncertainty principle, Schrödinger’s cat, or Gödel’s proof.#3 Barkley Rosser is no exception. Needless to emphasize that his understanding of physics and logic is even worse than his understanding of profit.

(xi) By invoking quantum mechanics in order to defend the logical inconsistency of economics he again makes a fool of himself. Schrödinger’s cat is “The most misunderstood thought experiment in all of Science. The cat is used as an illustration of the fallacy in applying quantum mechanical principles to macroscopic objects. Cats cannot exist in a superposition of alive and dead.”#4

(xii) Because economics cannot exist in a superposition of true and false, all false profit theories have to be eliminated. Economists have failed at this task until this day. 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.

(xiii) Barkley Rosser is defending the indefensible. He always was and still is out of science.#5

#1 See also ‘Getting out of the economics swamp
#2 See also ‘Economics: a science without scientists
#3 See also ‘How economists shoot themselves non-stop in the methodological foot
#4 Source
#5 See also ‘Economists: The Trumps of science

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REPLY to anne on Jul 2

Economics in its four incarnations ― Walrasianism, Keynesianism, Marxianism, Austrianism ― is one of the worst scientific scandals in human history and you and Barkley Rosser are part of it.*

* For details of the big picture see cross-references Incompetence

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REPLY to Dennis Pickard on Jul 3

You say: “It seems to me your equation relates to changes in inventory, not profits.”

This is NOT the case. Changes of inventory have been explicitly excluded with the condition X=O in footnote 2 above.#1 Inventories have been dealt with at length elsewhere.#2

Note that there is monetary profit and nonmonetary profit. In order to keep the discussion FOCUSED, inventories, nonmonetary profit, distributed profit, retained profit and related phenomena have ALL been left out here. Of course, they have been dealt with elsewhere. This is why references are given.

The sole point to PROVE here is that profit/loss is (in the most elementary case) the mirror image of dissaving/saving and that it has NOTHING to do with what capitalists, workers, laypeople, commonsensers, or scientifically incompetent economists have hallucinated since Adam Smith/Karl Marx it is.

Profit is NOT the income of capital.

Your attempt to de-focus the issue again by taking in a ‘surplus of utility’ and then making a measurement problem out of it is futile. Monetary profit is (in the most elementary case) tangible cash in the box and measurable with the precision of two decimal places. Qm=-Sm is a testable proposition#3, utility is a NONENTITY. To mix the two concepts is the sure way to scientific failure.#4 By putting utility into the Walrasian axioms=microfoundations economists are since 140+ years on the way to the inescapable final delirium.

#1 Link to footnote 2
#2 See for example ‘Primary and Secondary Markets
#3 See ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#4 See also ‘Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist


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LINKS at Angry Bear on Jul 4

The profit theory is false since Adam Smith. This is one of the greatest embarrassments in the history of the sciences. For the proof see:
Profit and stupidity
Economists: scientists or political clowns?
and cross-references Profit

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LINKS at Mike Norman Blog on Jul 4

The profit theory is false since Adam Smith. This is one of the greatest embarrassments in the history of the sciences. For the proof see:
Profit and stupidity
Economists: scientists or political clowns?
and cross-references Profit
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COMMENT on John Vertegaal, Dennis Pickard on Jul 5

Barkley Rosser takes it upon him to explain the macrofoundations approach. Needless to emphasize that he fails.

(i) He argues: “This implies certain things that neither you nor he mention, that such a firm would have enormous monopoly power, hence an ability to arbitrarily change price, and price certainly matters for all this.”

This is inaccurate. In the most elementary case the conditions of market clearing and budget balancing holds and in this case the price as the DEPENDENT variable is given as P=W/R. For details see: ‘True macrofoundations: the reset of economics

If the firm sets any other price then the quantity becomes the dependent variable. In this case the market does NOT clear and inventory changes happen. Note that the macrofoundations approach deals with the systemic properties and the behavior of the economy. There is NO vacuous second-guessing of human behavior at all. This is the whole point of the paradigm shift.

(ii) He asserts: “Egmont claims inventories are irrelevant.” This is NOT the case. Inventories have been dealt with at length elsewhere. See for example: ‘Essentials of Constructive Heterodoxy: The Market

(iii) He asserts: “His accounting and axioms imply equilibrium conditions that he does not admit he is doing”. This is NOT the case. Equilibrium, clearly, is a NONENTITY and all theories/models that apply the equilibrium concept are a priori false. For details see ‘Equilibrium and the violation of a fundamental principle of science

To apply the condition of market clearing or budget balancing has NOTHING to do with equilibrium. It is the other way round, equilibrium implies market clearing and budget balancing. This is hard to understand for confused confusers.

(iv) He mentions: “… just as in fact the NIPA of the US simply impose the accounting identity that savings equals investment.” The proof has been given that the IS-identity is false. See ‘The Common Error of Common Sense: An Essential Rectification of the Accounting Approach’ and ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

Barkley Rosser is lost in yesterday economics and simply cannot get his head around the methodological imperative that economics has to be macrofounded.

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COMMENT John Vertegaal, Dennis Pickard on Jul 5

Barkley Rosser does not get the simplest of all economic configurations. These three axioms constitute the macrofoundations: (A1) Yw=WL, (A2) O=RL, (A3) C=PX. For a start, two conditions hold: market clearing X=O and budget balancing C=Yw. This yields the price as dependent variable P=W/R. Monetary profit is defined as Qm≡C-Yw and is ZERO under the condition of budget balancing. Changes of the wage rate change the market clearing price in the same direction but do NOT affect monetary profit. This is an unassailable mathematical fact which can be checked by national accounting. Note that ALL variables of the axioms are measurable.

The start configuration is a limiting case and the two conditions are lifted in the course of further analysis. Who does not understand the simplest case, though, is unfit for understanding the general case with non-market-clearing (= inventory changes) and non-budget-balancing (= saving/dissaving).

The interesting thing is that the two conditions market clearing X=O and budget balancing C=Yw also appear in equilibrium models and this means that equilibrium models are zero profit models. The representative economist is seldom aware of this implication.

“The Walrasian prices correspond to the Marshallian long-run equilibrium prices where every producer is making zero excess profits. Thus, since in the short-run non-zero profit is possible, the actual short-run prices cannot always be used for aggregation. But, from the macro perspective of Walrasian general equilibrium, the total profits in this case cannot be other that zero (otherwise, we would need a Santa Claus to provide the aggregated positive profit) but this does not preclude the possibility of short-run profits and losses of individual firms canceling each other out. (Boland)

“Some economists hold that although the profit motive is necessary in a business economy, actual profit is unnecessary, and that in fact pure profits are zero in a competitive economy.” (Murad)

Needless to emphasize that the manifest CONTRADICTION between zero profit in equilibrium models and non-zero macroeconomic profit/loss in reality has been buried under a gigantic heap of confused blather. In the real world macroeconomic profit is NON-ZERO since hundreds of years because of the Profit Law which says Qm=-Sm in the most elementary case.

Because the profit theory is false since Adam Smith ALL economics textbooks from Samuelson to Mankiw and Rodrik are false.#1 The logical blunder is right before everybody’s eyes. As Barkley Rosser recommends: “Look at any Principles of economics textbook.”

Because the profit theory is false Econ 101 is false.#2 Economics students, though, swallow this proto-scientific garbage generation after generation without turning a hair. This gives one a reliable and precise metric of the abysmal stupidity of the folks that populate the universities.

#1 See ‘The father of modern economics and his imbecile kids
#2 For details see cross-references Econ 101

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REPLY to Barkley Rosser on Jul 6

(i) Barkley Rosser misquotes: “So he identifies ‘market clearing’ which (ahem) he assumes, as being given by X=0.” Actually, it is X=O, that is, quantity bought X = output O. Barkley Rosser should have immediately recognized that X=0 makes NO sense at all. Obviously he does NOT understand what he is commenting on.

(ii) The condition of market clearing X=O does NOT imply equilibrium, while equilibrium implies market clearing. The idea of equilibrium entails that the system moves towards this end-state. Nothing of the sort happens in the economic system as defined by macrofoundations.

Equilibrium is a NONENTITY. The economic system evolves but neither towards a short-run nor a long-run equilibrium. In fact, the proof has been given that the market economy is INHERENTLY UNSTABLE.#1 There is NO such thing as general supply-demand-equilibrium. The whole of equilibrium economics from Marshall to DSGE is PROVABLE false.#2

(iii) I have NOT “discovered that profits are zero (in equilibrium)”. This is a feature of Walrasianism. I have indeed discovered that monetary profit is ALWAYS non-zero, i.e. Qm=-Sm in the most elementary case. Profit is zero in the analytical limiting case of household sector’s exact budget balancing, i.e. C=Yw, which practically never happens.

(iv) Barkley Rosser summarizes: “To close this out, aggregate profits in the US are currently about $1,8 trillion, about 10% of US GDP, and far above Egmont’s zero.” I NOWHERE said that profit is zero in the US or elsewhere. Just the contrary. The macrofounded profit theory unambiguously states that total monetary profit is given by Qm≡Yd+(I-Sm)+(G-T)+(X-M).#2 This is a testable formula which holds also for the US.

In sum: Barkley Rosser cannot get out of his self-created confusion. Who cannot handle three simple equations (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and the definition of total monetary profit (Qm≡C-Yw) is forever out of economics. Note that ALL variables in ALL equations are unambiguous and measurable. There is NO room for interpretation and blather.

#1 See ‘The market economy is inherently unstable and economists never grasped it
#2 See ‘First Lecture in New Economic Thinking

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REPLY to Barkley Rosser on Jul 7

You say: “I find it weird that you seem to think it is a big mystery or might be extremely unusual that wages and profits might be inversely related.”

Now, this is as old as Ricardo: “… profits would be high or low in proportion as wages were low or high” and it is FALSE. It is the old mistake of mentally retarded economists to generalize the results of partial analysis. For a single firm it is true that a reduction of the wage rate increases profit but for the economy as a whole this does NOT hold.#1

It is the Fallacy of Composition all over again.

The most elementary economy is given with three equations Yw=WL, O=RL, C=PX, two conditions X=O, C=Yw and the definition of total monetary profit Qm≡C-Yw.#2 This yields P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is equivalent to W/P=R (2), i.e. the real wage is equal to the productivity. This holds, no matter how the wage rate is set. A wage reduction leads to a proportional fall of the market clearing price. Profit Qm does NOT change because the budget is balanced, i.e. C=Yw, and from this follows Qm=0.

So Ricardo was wrong: from a lower wage rate does NOT follow a higher profit for the economy as a whole. There is NO inverse relationship between wages and total profit in the most elementary economy. Where, then, does profit come from? Not from a higher productivity either! Productivity changes lead to inverse changes of the market clearing price according to (1).

It was Marx who asked the right question: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.”

Trivially true.#3 As long as the budget is balanced, i.e. C=Yw, total monetary profit Qm is zero. Because we know already that the Profit Law states Qm=-Sm it is quite obvious that the business sector as a whole can only draw more out of the circulation, i.e. C greater Yw, if the household sector throws more into the circulation, in other words if the household sector dissaves, i.e. if Sm≡Yw-C is negative, i.e. if C is greater than Yw.

From nothing comes nothing, even economists understand this.

So, Marx asked the right question but gave the wrong answer because he was fixated on the labor theory of value and not very good at logic and math.#1 Those who came after him were even worse.

#1 See ‘Profit for Marxists
#2 For details see ‘Profit theory in less than 5 minutes
#3 See also ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down

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REPLY to Anonymous on Jul 8

Your conclusion: “I’d hazard a guess that it’s founded on differences of subjective opinion rather than facts” is entirely beside the point. First of all, science is NOT a matter of opinion (= doxa) but of knowledge (= episteme). Scientific knowledge is well-defined by material and formal consistency.

Now, every economist knows the following:
(i) Economics is a failed science, that is, the four main approaches Walrasianism, Keynesianism, Marxianism, Austrianism are materially/formally inconsistent.
(ii) The foundational concept profit is ill-defined (see Desai and others)
(iii) The concept of capital is ill-defined (see Cambridge Capital Controversy)
(iv) The concept of equilibrium is ill-defined: “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.” (Blaug), see also (Ingrao et al.), (Ackerman et al.)

Therefore, ALL theories/models that apply the traditional concepts of profit, capital, equilibrium are A PRIORI false. And this provides the implicit consensus of every worthwhile economic discussion: there is NO USE at all to stir this 200+ years old rotten soup one more time. The only worthwhile task for the economist/scientist has been defined by Joan Robinson: “Scrap the lot and start again.”

Clearly, a paradigm shift is the last thing Barkley Rosser wants. Being a lifelong loudspeaker in the economics swamp where “nothing is clear and everything is possible” (Keynes) he attempts to defend his natural habitat with the tried and tested rhetorical means of a confused confuser.

What has been accomplished in this thread is:
(1) A paradigm shift from obsolete microfoundations to correct macrofoundations.
(2) The consistent derivation of total monetary profit from the most elementary set of macroeconomic axioms.
(3) The clarification of the OBJECTIVE nature of profit and the refutation of the familiar SUBJECTIVE interpretations.
(4) The irreversible final debunking of Barkley Rosser.
(5) The presentation of the complete macrofounded Profit Law Qm≡Yd+(I-Sm)+(G-T)+(X-M). This is a testable equation that holds for all countries. Theoretical economics has done its job, now national econometricians can do theirs.

Everybody who wants to refute the macrofounded profit theory ― which fully replaces all profit theories since Adam Smith/Karl Marx ― has a straightforward task: to prove that the Profit Law is either logically or empirically inconsistent.

Science is NOT a matter of opinion but of proof. Everything else is brain-dead blather of soap box economists.

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REPLY to Barkley Rosser on Jul 9

(i) You say: “So, when Qm = Sm, they are positively related, but when you provide your more general equation, it is (1-Sm) that is entering on the right-hand side. This implies a negative relationship. So, are they positively related or negatively related, …”

This is a typo of your OWN making. It always holds and I always write Qm=-Sm.#1 As usual, the contradiction is only in your muddled head.

(ii) You say: “And that more complicated equation is very close to a Keynesian formulation, but, of course, you have denounced Keynesian economics as totally and utterly false.”

I have not only “denounced Keynesian economics as totally and utterly false” but I have PROVED it.#2 Allais has done this before#3: “Toutes ses [Keynes’s] deductions, à notre avis, manquent absolument de rigeur. … L’intuition de Keynes lui a fait sentir où se trouvaient les difficultés, mais son insuffisance logique ne lui a pas permis de résoudre les problèmes que son intuition lui avait fait entrevoir.” In plain English: Keynes was scientifically incompetent. Among economists, though, this defect is rarely noticed because it is the old normal since Adam Smith.

(iii) Standard economics is based on the Walrasian axiom set = microfoundations: “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)

Everybody knows by now that equilibrium is a NONENTITY: “Just as classical General Equilibrium Theory has never been able to provide a definitive account of how equilibrium prices come to be established, so Rational Expectation Theory has not shown how, starting from relative ignorance, everything that can be learned comes to be learned.” (Hahn)

Because of this, microfoundations have to be fully replaced by macrofoundations. The most elementary version consists of the three axioms A1 Yw=WL, A2 O=RL, A3 C=PX. It is as clear as the day, except for the muddle head Barkley Rosser, that macrofoundations A1 to A3 do NOT contain the concept of equilibrium in marked contrast to microfoundations HC1 to HC5.

So: “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.”#4

Walrasianism and Keynesianism is materially/formally inconsistent proto-scientific rubbish and it is nowadays only defended by a rearguard of incorrigible muddle heads.

#1 You can check this with Ctrl+F and entering Qm in the search field
#2 For more details see ‘Keynesianism ― the economists’ senile dementia
#3 See ‘How Keynes got macro wrong and Allais got it right
#4 See ‘Productivity and the zombie apocalypse

***
REPLY to Barkley Rosser on Jul 10

You say: “… but they are what get you from your three empty accounting identities to your wonderful condition of Qm = Sm, …”

Again. This is a typo of your OWN making. It always holds and I always write Qm=-Sm. The minus sign is easy to overlook, so perhaps this helps Qm = ―Sm.

But the real issue is not the typo, the issue is UNDERSTANDING. The verbalization of the equation reads: “It always holds Qm+Sm=0 or Qm=-Sm, in other words, at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law.”

Barkley Rosser cannot get out of his self-created muddle. Who cannot handle three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (Qm≡C-Yw, Sm≡Yw-C) and UNDERSTAND IMMEDIATELY that Qm=-Sm, i.e. that business profit and household saving are NEGATIVELY related, is OUT of economics.

When the pivotal concept profit is not properly understood the rest of the analytical superstructure of economics falls apart and there is NO use at all to filibuster about capital and equilibrium. The best the representative economist can do for the welfare of humanity is to get out of the way.

***
WRAP-UP for Barkley Rosser on Jul 13

Rewarding to see that you have drawn the consequence of a rare flash of insight and left economics altogether.*

Your true competence has always been insightful comments on the sex life of the House of Sa’ud and other celebrities as demonstrated in two recent pieces:
  • Muhammed Bin Nayef Bin Abdulaziz Al Sa’ud Confined To His Palace
  • Was Thomas Jefferson A Monstrous Rapist?
Economics has never been your thing. Good for society to learn that you have left profit, capital, equilibrium and other nonentities behind for good and dedicate your talent now fully to Sexual Research.

May the rest of scientifically failed economists follow your example.

* See ‘Economists: scientists or political clowns?

***
REPLY to Barkley Rosser, vertegaa, Anonymous on Jul 14

Barkley Rosser argues: “You can read about this stuff in the book I already cited by me, as well as several of my other books, and also in standard grad level micro theory textbooks like Varian or Mas-Colell, Whinston, and Green.”

Note that standard economics is axiomatically false and because of this the textbooks mentioned are scientifically worthless.#1

The standard axiom set#2 consists of blatant nonentities but each student generation has swallowed it since 140+ years without turning an eyelid. In order to be applicable HC2, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function. Taken together, all axioms and auxiliary assumptions crystallize to SS-DD-equilibrium or what Leijonhufvud famously called the Totem of Micro/Macro.

Needless to stress that ALL THREE elements of the standard tool (SS-function, DD-function, equilibrium) are NONENTITIES. Any discussion about forward or backward bending supply curves or stable/unstable equilibria is as vacuous and ridiculous as any discussion about dancing-angels-on-a-pinpoint.#3

All standard textbooks are false because microfoundations and the definition of profit/income is provable false ― there is NO NEED AT ALL to read or quote this stuff.

This is the challenge of economics: “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.” (Ingrao et al.)

#1 See also ‘The father of modern economics and his imbecile kids
#2 “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)
#3 See ‘All models are false because all economists are stupid

***
REPLY to Anonymous on Jul 15

There is the quantity produced per period = output O. There is the quantity sold per period X. These two quantities are different. But it is logically and practically possible that they are equal. If they are not equal the stock of hitherto unsold output of the business sector (= inventory) changes.

To write down X = O is to say that the market is cleared in the given period. For the purpose of analysis X = O can also be used as a condition.

The concept of the equality of two quantities is different from the concept of equilibrium. Equilibrium IN ADDITION implies that there is some force (= Invisible Hand) that makes that the quantities eventually become equal.

This, though, is NOT the case for the economic system. It has NEVER been proven that the monetary economy is an equilibrium system.* The fixpoint theorem is an existence proof (i.e. it is possible that X = O) but does NOT prove that X = O is realizable.

Time to take notice that equilibrium is a dead concept, in fact, it has already been dead in the Jevons/Walras/Menger cradle 140+ years ago. This is common knowledge.

“The mathematical failure of general equilibrium is such a shock to established theory that it is hard for many economists to absorb its full impact.” (Ackerman)

“To conclude, the proof of existence concerns a state of the economy that cannot be attained by the individual actions of the self-aggrandizing and decentralized agents originally specified for the general equilibrium model.” (Nadal)

“Gerard Debreu in his classic Theory of Value states that his theory is concerned with the explanation of prices. Others as distinguished as Kenneth Arrow and Frank Hahn deny that general equilibrium theories are explanatory. Moreover, some prominent economists and philosophers have argued that work in general equilibrium theory is not empirical science at all.” (Hausman)

“The fact that it has not been possible to build a process for the formation of equilibrium prices is disastrous when it is recalled that the fundamental task of theory is precisely to make coordination in the market intelligible.” (Benetti et al.)

“Just as classical General Equilibrium Theory has never been able to provide a definitive account of how equilibrium prices come to be established, so Rational Expectation Theory has not shown how, starting from relative ignorance, everything that can be learned comes to be learned.” (Hahn)

Equality X = O is NOT the same as equilibrium. Equality is logically and practically possible but equilibrium is a NONENTITY. No competent economist applies it any longer. Somehow, this seems to have escaped Barkley Rosser and you.

* Just the contrary see ‘Could we, please, all focus on the key question of economics?

***
REPLY to Anonymous on Jul 16

PROVABLE false
• profit theory, since 200+ years,
• Walrasian microfoundations (including equilibrium), since 140+ years,
• Keynesian macrofoundations (including I=S, IS-LM), since 80+ years.

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

By implication ALL posts that contain these concepts are proto-scientific garbage. This includes your exchange with Barkley Rosser.

You may not have heard it but Barkley Rosser has now left economics for good and dedicates his talent to Sexual Research, gossiping about academic celebrities, namedropping and reputation management.

June 28, 2017

Profit and stupidity

Comment on Barkley Rosser on ‘Comments on Profit and Capital’

Blog-Reference

The Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008). This translates into: after 200+ years economists still do not know what profit is.

Barkley Rosser quotes Marx, Piketty, Ricardo, the Austrians, and the textbooks in order to show how economists have dealt with profit and closely related concepts. Yes, all economists/schools had their own definition of profit which only proves, in Popper’s words: “This shows that they are not all true. For if they conflict, then at best only one of them can be true.” In fact, ALL are provable false.#1

In his lengthy post Barkley Rosser throws in a host of phenomena that are superficially related to profit (capital, machinery, depreciation, waiting, roundaboutness, risk, profit distribution, etcetera) and thus thoroughly messes the whole issue up. This is the tried and tested swampification strategy of confused confusers. In order to determine profit all these related phenomena have to be put aside in the first round for reintroduction at a later stage. The lethal analytical mistake is to automatically couple profit and capital. Both have to be properly kept apart. Barkley Rosser’s methodological incompetence reveals itself already in the thread’s title.

For the determination of monetary profit of the economy as a whole one has to start with the most elementary case of a pure consumption economy without investment, government, and foreign trade.#2 In this elementary economy three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw, (iii) C is greater than Yw.
In case (i) the monetary saving of the household sector Sm≡Yw-C is zero and the monetary profit of the business sector Qm≡C-Yw, too, is zero.
In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds Qm+Sm=0 or Qm=-Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. Note that profit has NOTHING at all to do with capital. To mindlessly couple profit and capital has been the crucial analytical blunder of the founding fathers from which economics has not recovered until this day. These 200+ years of analytical sloppiness and confusion are a telling metric for the scientific incompetence of economists.#3

Profit for the economy as a WHOLE has NOTHING to do with productivity, the wage rate, the working hours, exploitation, competition, capital, power, waiting, risk, greed or the smartness of capitalists. Overall profit/loss is determined in the most elementary case by the change of the household sector’s debt.#4 This is a testable proposition.

Egmont Kakarot-Handtke

#1 See ‘The Profit Theory is False Since Adam Smith
#2 The macrofoundations approach starts with three systemic (= behavior-free) 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. For a start it holds X=O.
#3 See also ‘How the intelligent non-economist can refute every economist hands down
#4 For more details see cross-references Profit


Immediately following 'Economists: scientists or political clowns?'

Marx, the moron

Comment on Chris Dillow on ‘Why libertarians should read Marx’

Blog-Reference and Blog-Reference and Blog-Reference and Blog-Reference on Jul 4 adapted to context and Blog-Reference

There is 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 the scientific standards of material and formal consistency are observed.

Theoretical economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong.

Marx, clearly, was NOT a scientist but a political agenda pusher. However, after the scientific triumphs of Copernicus, Kepler, Galileo, Newton, Laplace, Leibniz etcetera agenda pushing had to be dressed as science. This gave rise to what Feynman famously called cargo cult sciences.

What Marx did was sociology, history, storytelling, prophesy and agenda pushing. He had NO idea how the monetary economy works because he never figured out what profit is.* That is rather bad for an economist but what is worse is that After-Marxians did not spot and rectify Marx’s blunders in the past 130+ years.

What we actually have is the pluralism of provable false theories. Walrasianism, Keynesianism, Marxianism, Austrianism look antagonistic on the surface but have one essential thing in common: they are all fake science.

Egmont Kakarot-Handtke

* See ‘Profit for Marxists


Related 'Economics: 200+ years of scientific incompetence and fraud' and 'The end of political economics' and 'Profit and stupidity' and 'Economists: scientists or political clowns?'

***
REPLY to Tom Hickey on Jun 30

Your profit theory is false and because of this your whole economic theory is false and as a consequence all your policy proposals are worthless or even counterproductive. For details see:
Profit and stupidity
Economists: scientists or political clowns?

***
COMMENT on Jun 30

Why libertarians should NOT read Marx ― and vice versa ― and why both should get out of economics and switch on TV and look sitcoms instead:
Profit and stupidity
Economists: scientists or political clowns?

***
REPLY to B. L. Zebub on Jul 1

“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. 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

Economics is scientifically worthless. Marx and Smith and the rest are storytellers: “… in fact he [Adam Smith] disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” (Schumpeter). Same with Marx.

Economics claims to be a science but is NOT. Economists claim to know how the economy works but do NOT. Neither Libertarian nor Marxian economic policy guidance ever had sound scientific foundations. From the Wealth and the Capital up to the present economic texts have less scientific content than the Beatles’ Songbook.#2

#1 See also ‘Economists: scientists or political clowns?
#2 For the details of the bigger picture see cross-references Political economics

The minimum wage debate: a showpiece of economists’ hereditary idiocy

Comment on Sandwichman on ‘Seattle Minimum Wage’

Blog-Reference and Blog-Reference

“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)

Fact is that economists do NOT have the true theory. Fact is, in methodological terms, that economics is axiomatically false. The lethal blunder comes under the label of microfoundations 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.”

The methodological blunder of the minimum wage debate consists in partial analysis and microfoundations. This type of analysis NEVER leads to results that can be generalized, but always to results that change from place to place and from time to time. So, this type of analysis (i) runs directly into the Fallacy of Composition, and (ii), remains forever inconclusive.

Interim result: The traditional microfoundations approach is as false as one can get and has to be fully replaced by the macrofoundations approach.

The correct macro employment equation#1 is reproduced on Wikimedia.#2 From this objective-structural-systemic relationship follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(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.

The complete structural-systemic employment equation is a bit longer and contains in addition the public sector and the foreign trade sector.

Item (i) and (ii) cover the familiar arguments about how effective demand affects employment. Item (iii) embodies the macroeconomic price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

From this follows:
(1) The average wage rate has to be prevented from falling because this leads to rising unemployment and deflation. One possibility is to fix a minimum wage rate which increases over time. Note that this is a SYSTEMIC necessity and has NOTHING to do with social policy.
(2) The minimum wage rate has to be implemented nationwide (strictly speaking world wide). To implement it locally or for certain branches is absolutely counterproductive.
(3) The implementation has to be done intelligently. It is, for example, stupid to kill the marginal firms with the introduction of a nationwide minim wage.
(4) Given their track record of idiocy, economists have to be kept out of further discussion and implementation.

Minimum wage policy has to be carried out under the macroeconomic condition w greater than p+r+pr, that is roughly speaking, employment increases if the increase of the average wage rate w is greater than the increase of average price p and productivity r.

To make local and partial minimum wage increases will in all eternity lead to inconclusive results and only keep a bunch of incompetent scientists busy with senseless debate, inconclusive empirical studies, and brain-dead blog posts.

Egmont Kakarot-Handtke

#1 For details see ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 Wikimedia


Related 'Economics and the Fallacy of Insufficient Abstraction' and 'The role of labor and business in a well-organized society' and 'Rethinking the Phillips curve' and 'Attention: there are THREE types of inflation' and 'Textbooks and the mental cloning of dumb economists'. For more details of the bigger picture see cross-references Employment

***
REPLY to Barkley Rosser on Jun 28

Note that the EconoSpeak admin=your sidekick Sandwichman has deleted since Jun 24 the following posts:
The minimum wage debate: a showpiece of economists’s hereditary idiocy
Note on Marshall’s Magic Wand
Economics and the Fallacy of Insufficient Abstraction
The role of labor and business in a well-organized society

In these posts and the references you find the detailed refutation of your unqualified blather.*

Egmont Kakarot-Handtke

* See also cross-references Employment and cross-references Incompetence

***
REPLY to Barkley Rosser on Jun 29

I agree with you about the brilliance of Joan Robinson which is encapsulated in her assessment of economics: “Scrap the lot and start again.”

The others, who are brilliant in your eyes, will not even make it into a footnote of the history of science. With regard to Adam Smith I concur with Schumpeter: “… he had no such ambitions; in fact he disliked whatever went beyond plain common sense. He never moved above the heads of even the dullest readers. He led them on gently, encouraging them by trivialities and homely observations, making them feel comfortable all along.” If this is your definition of brilliance you are probably one of the dullest readers.

For an assessment of the rest of your list see:
Marx, the moron
Walras is long gone
How Keynes got macro wrong and Allais got it right
Hayek and other informationally retarded proto-economists
The father of modern economics and his imbecile kids
How Arrow pushed economics over the cliff

Economics is a failed science and those you call brilliant messed it up.

***
Addendum on Jun 29

“Few people, and least of all we economists ourselves, are prone to offer us congratulations on our intellectual achievements. Moreover our performance is, and always was, not only modest but also disorganized. Methods of fact-finding and analysis that are and were considered substandard or wrong on principle by some of us do prevail and have prevailed widely with others.” (Schumpeter)

June 27, 2017

Empiricism, or looking through the microscope at the universe

Comment on Mark Thoma on ‘An Empirical Turn in Economics Research’

Blog-Reference

This is what empiricists overlook or ignore: “Indeed, there is no such thing as an uninterpreted observation, an observation which is not theory-impregnated.” (Popper)

Now, the fact of the matter is that theoretical economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong. What we actually have is the pluralism of provable false theories.

A theory is the best possible mental representation of reality. If the theory is false empirical tests either lead to a refutation or to inconclusive results. And this is exactly what happened: “… suppose they [the economists] did reject all theories that were empirically falsified … Nothing would be left standing; there would be no economics.” (Hands)

Economics is a failed science and the lethal methodological blunder happened at the level of theory. Accordingly, what is needed is nothing less than a paradigm shift: “Yet most economists neither seek alternative theories nor believe that they can be found.” (Hausman)

In order to avoid the reproach of being lost in vacuous theorizing economists escape to empiricism, in the extreme case to “measurement without theory”. But without the true theory at the back of their minds empiricists cannot rise much about the trivial, commonsensical, and the spatio-temporal particular that defies generalization. Thus, economics degenerates to folk psychology, folk sociology, folk history, and number crunching. The press and the general public likes this stuff very much because it is “realistic”. But storytelling decorated with suggestive facts/data is not science, it is what Feynman called cargo cult science.

All economic schools have one thing in common: they do not understand the scientific method. Their approach can roughly be characterized as microfoundations and bottom up: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals.” (Arrow)

This, in a nutshell, is the lethal defect of economics because methodologically 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/motive/behavior/action to the explanation of how the economic system works. In other words, microfoundations and bottom-up never leads to an understanding of how ‘the economy’ works.

Keynes realized that the classical microfoundations approach had led into a cul-de-sac 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 his macrofoundations.#1

The lesson from the history of economic thought is that theoretical economics has to proceed top-down, i.e. from macrofoundations which define ‘the economy’, down through intermediate levels (sectors, branches, firms, households) to the individual. What empiricists do not understand is that NO amount of microeconomic research ever leads to the understanding of ‘the economy’.

The microfoundations approach had been doomed to failure already 140+ years ago. The current empirical turn in economic research does not help much as long as the defective theoretical foundations are still in place. The correct sequence is: before the empirical turn comes the theoretical turn, that is, the paradigm shift.#2

What the representative economist still does not understand is that economics is NOT a social science but a system science and that if it isn’t macro-axiomatized, it isn’t economics.

Egmont Kakarot-Handtke

#1 See ‘The unfinished Keynes
#2 For details see ‘First Lecture in New Economic Thinking

June 26, 2017

The end of political economics

Comment on Ravi Kanbur on ‘W. Arthur Lewis and the tradeoffs of economics and economists’

Blog-Reference and Blog-Reference on Jun 28 and Blog-Reference

There is no such thing as economics. 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 the scientific standards of material and formal consistency are observed.

Theoretical economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong. What we actually have is the pluralism of provable false theories.

Theoretical economics is scientifically unacceptable. Because of this, economics has nothing to offer in the way of a scientifically well-founded advice: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Fact is that neither Orthodoxy nor Heterodoxy has the true theory and that, by consequence, economic policy guidance of BOTH sides has NO sound scientific foundation. Economists should no longer pretend to do science but openly push their respective political agendas.

Even if economists had the true theory they would have NO political mandate. There is NO such thing as a trade-off between theoretical and political economics. It was John Stuart Mill who told economists that they must decide themselves between science and politics: “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.”

Since the founding fathers economists violate the principle of the separation of science and politics. Economics is what Feynman famously called a cargo cult science and neither right wing nor left wing economic policy guidance has a sound scientific foundation since Adam Smith/Karl Marx. Political economics has produced NOTHING of scientific value in the last 200+ years. It is high time that economics frees itself from the all-pervasive and all-corrupting grip of politics.

What Burke termed ‘one of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion’ is a POLITICAL question entirely OUTSIDE the sphere of economics. Economists have to step down from the political soap box which the founding fathers have illegitimately usurped 200+ year ago.

Egmont Kakarot-Handtke


Related 'Economics: 200+ years of scientific incompetence and fraud' and 'Economics between cargo cult, farce, and fraud'. For details of the bigger picture see cross-references Political economics and cross-references Incompetence

***
REPLY to Ken Zimmerman on Jul 5

You summarize: “Many, including Ely himself, originally nurtured visions of the AEA becoming a applied and social policy body, an American version of the German Verein für Socialpolitik, with a goal to influence the general public and politicians, and push for social and economic reform.”

You are making my point: “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 the scientific standards of material and formal consistency are observed.”

The economic societies (AEA, VfS, RES and so on) defined themselves as agenda pushers, that is, they opted themselves OUT of science. No surprise then that economists have produced NOTHING of scientific value since the founding fathers. Until this day economics lacks the true theory.

Worse: Walrasians, Keynesians, Marxians, Austrians have corrupted science by de facto accepting the pluralism of provable false theories.

Worst: Vis-a-vis the general public economists claim since Adam Smith/Karl Marx to do science.

Clarification: Economics is NOT a science and neither orthodox nor heterodox economists are scientists. They have never been anything else than brain-dead blatherers, gossipers, and agenda pushers.

Note on Marshall's Magic Wand

Comment on Sandwichman on ‘Marshall's Magic Confidence-Wand’

Blog-Reference and Blog-Reference

Marshall explains commercial depression: “The chief cause of the evil is a want of confidence.” and “In short there is but little occupation in any of the trades which make Fixed capital.”

No taxi driver could explain it better. This kind of “explanation” is paradigmatic for the level of economic science and for these brain-dead trivialities Marshall is still ackowledged as great economist. One trembles to contemplate what the economics of his peers had looked like.

Update for students: Marshall’s economics has already been dead in the cradle in 1890. That he and his Principles are not buried and forgotten is a sure indication of the utter scientific incompetence of later generations of scholars. Marshall’s supply-demand-equilibrium is one of the most ridiculous constructs in the history of the sciences but still the centerpiece of every economics textbook.

For details see:
Marshall: a monument of scientific incompetence
Marshall and the Cambridge school of plain economic gibberish
Essentials of Constructive Heterodoxy: The Market

Egmont Kakarot-Handtke

June 25, 2017

Economics and the Fallacy of Insufficient Abstraction

Comment on Sandwichman on ‘”If There Is Any Such Thing”: Why read Hoxie on theory?’

Blog-Reference

What is the core problem of economics? Bagehot made it clear back in 1885: “It [Political Economy] is an abstract science which labours under a special hardship. Those who are conversant with its abstractions are usually without a true contact with its facts; those who are in contact with its facts have usually little sympathy with and little cognisance of its abstractions. Literary men who write about it are constantly using what a great teacher calls ‘unreal words,’ ― that is, they are using expressions with which they have no complete vivid picture to correspond. They are like physiologists who have never dissected; like astronomers who have never seen the stars; and, is consequence, just when they seem to be reasoning at their best, their knowledge of the facts falls short. Their primitive picture fails them, and their deduction altogether misses the mark ― sometimes, indeed, goes astray so far, that those who live and move among the facts boldly say that they cannot comprehend ‘how any one can talk such nonsense.’ Yet, on the other hand, these people who live and move among the facts often, or mostly, cannot of themselves put together any precise reasonings about them.”

This, though, was not news because J. S. Mill reported already in 1874 about the two classes of inquirers.

“It has been again and again demonstrated, that those who are accused of despising facts and disregarding experience build and profess to build wholly upon facts and experience; while those who disavow theory cannot make one step without theorizing. But, although both classes of inquirers do nothing but theorize, and both of them consult no other guide than experience, there is this difference between them, and a most important difference it is: that those who are called practical men require specific experience, and argue wholly upwards from particular facts to a general conclusion; while those who are called theorists aim at embracing a wider field of experience, and, having argued upwards from particular facts to a general principle including a much wider range than that of the question under discussion, then argue downwards from that general principle to a variety of specific conclusions.”

Bottom line: there are two types of economists, the upwarders and downwarders. This distinction overlaps with the distinction between induction and deduction which in turn overlaps with the distinction between practitioners and theoreticians.

The core problem of economics is that neither upwarders nor downwarders were particularly successful. After 200+ years economics is still at the proto-scientific level.

Methodologically, unionists are upwarders: “Unionists are not theorists; unionism is an eminently practical thing.” (Hoxie). “Theory and trade unionism are almost contradictory terms.” (Arnos) As a result, unionists have no true theory of how the economy works and how the aggregate labor and product markets interact. In other words, union policy never had sound scientific foundations but always remained glued to the phenomenological surface. Unionists did not realize what Marx already clearly saw: “That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy.”

Because they have always been glued to the immediately practical of the here and now unionists have never figured out what profit is.#1 As a collateral damage they got stuck at the naive concept of exploitation and never arrived at the concept of crossover exploitation.#2

Fact is that the myopic upwarders, i.e. ‘these people who live and move among the facts’, i.e. labor and business, never arrived at a consistent profit and employment theory. But, and this is one of the worst scientific scandals in human history, neither did Walrasians, Keynesians, Marxians, and Austrians.#3

Both, the upwarders and downwarders fell victim to the Fallacy of Insufficient Abstraction and failed to explain how the actual economy and the labor market works. Time to throw Hoxi’s and Marshall’s and Walras’ and Keynes’ employment theories on the big heap of proto-scientific garbage.#4

Egmont Kakarot-Handtke

#1 See ‘Profit for Marxists
#2 See ‘The thing with profit and exploitation
#3 See ‘Unemployment ― the fatal consequence of economists’ scientific incompetence’ and ‘Have data, lack theory
#4 For the correct approach see ‘The role of labor and business in a well-organized society


Related 'Rethinking the Phillips curve' and 'Attention: there are THREE types of inflation' and 'Economic bungee jumping without cord'. For more details of the bigger picture see cross-references Employment

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ADDENDUM to Sandwichman on Jun 26

It is a characteristic trait of economics that problems are never solved but endlessly recycled. This explains why economics made no progress since Adam Smith: “... 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).

Economics is a bit like Nietzsche’s Éternel Retour de la pensée la plus lourde. Among the best known examples are capital theory, I=S, lump of labor theory, Say’s Law, Profit Theory. These are monuments of the scientific incompetence of economists.

Your recycling of these issues is a waste of time. Obviously it escaped your attention that the correct profit and employment theory is available on EconoSpeak and elsewhere. For analytical entry points see:
Economics and the Fallacy of Insufficient Abstraction
The role of labor and business in a well-organized society
Essentials of Constructive Heterodoxy: Say's Law
The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment

June 24, 2017

The role of labor and business in a well-organized society

Comment on Sandwichman on ‘Hoxie on “Fixed Group Demand Theory” (the “lump of labor”)’

Blog-Reference

“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)

Fact is that economists do NOT have the true theory. This holds in particular for employment theory, and the lump of labor theory is a case in point. The lethal methodological blunder of employment theory consists in the Fallacy of Composition, i.e. the illegitimate transfer of truths that hold for one firm/market onto the economy as a whole. What the representative micro-brained economist never understood is that what is true for the molehill is not true for the universe.

Methodological conclusion: the traditional microfoundations approach is as false as one can get and has to be fully replaced by the macrofoundations approach.

The correct macro employment equation#1 is reproduced on Wikimedia.#2 From this objective-structural-systemic relationship follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(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.

The complete structural-systemic employment equation is a bit longer and contains in addition the public sector and the foreign trade sector.

Item (i) and (ii) cover the familiar arguments about how effective demand affects employment. Item (iii) embodies the macroeconomic price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

From this follows the proper macroeconomic role of the institution union. To be clear, with the institution union is not meant the different historical variants as they have developed in different countries but an abstract entity that represents all workers/employees. At the other side of the table sits the abstract entity business which represents all firms of the business sector. These two macro-entities are now given the task to establish full employment by setting the average wage rate W and the average price P.

In the present situation (with rhoE and I given), a theoretically enlightened and politically empowered perfectly symmetric macro-institution would set the parameters as follows: price increase zero and wage increase greater than productivity increase. This increases employment for a while. Afterwards: price increase zero and wage increase equal to productivity increase. This stabilizes the economy at full employment.

With the historically given institutional setting one gets this chain of events: insufficient wage increase - employment L down/price P down - asymmetric weakening of the labor side - insufficient wage increase - employment down/price down - and so on. Correct macrofounded economic theory tells us that an economy with crappy institutions gets eventually caught in a spiral of deflation and falling employment. And that is exactly what can be observed.

Obviously, it is mentally retarded economists who ― after 200+ years still stuck with the lump of labor theory ― bear the intellectual responsibility for the economic mess.

Egmont Kakarot-Handtke

#1 For details see ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia’  and ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#2 Wikimedia