Home > Real-World Economics Review > RWER issue 56: Egmont Kakarot Handtke

RWER issue 56: Egmont Kakarot Handtke

Scrap the lot and start again

Egmont Kakarot-Handtke   [Germany]

Abstract: In the wake of the recent financial crisis heterodox economists have taken up a time-honored refrain and proposed to abandon the axiomatic method. The present paper argues that this proposal is self-defeating.

            An economic crisis is always a crisis of economic theory – of mainstream economics, to be sure – and the latest financial crisis is no exception. This is the day of reckoning for the heterodox camp and, of course, rightly so for quite different reasons. The heterodox economists, though, have a crisis of their own design. That there must be something better than current mainstream economics, all are agreed (including the neoclassical economists), but this consensus is accompanied by a bookshelves-filling disagreement about diagnosis and remedy. Regrettably the better theory is not available when the next crisis hits. Let us take Keynesianism as a case in point.

            The Keynesian Revolution was intended as both, a radical change of economic policy and a groundbreaking paradigm shift (Coddington, 1976). Keynes left no doubt about the scientific scope of the General Theory:

The classical theorists resemble Euclidean geometers in a non-Euclidean world (…). Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. (Keynes, 1973 p. 16)

            Keynes’s main concern was not market or policy failure but theory failure. He envisioned nothing less than a ‘complete theory of a monetary economy’ (Keynes, 1973 p. 293). While clearly aware that this at the same time required a consistent set of some kind of non-Euclidean axioms, Keynes had no desire that the particular forms of his ‘comparatively simple fundamental ideas (…) should be crystallized at the present state of the debate’ (cited in (Rotheim, 1981 p. 571)).

            There remained a huge gap between Keynes’s verbalized theory and its formal basis. His conceptual groundwork consists in the main of the well-known equations Y=C+I and S=Y–C (Keynes, 1973 p. 63). This formal basis is too small and on no account general. The palpable incongruence left too much room for interpretation and precipitated the lengthy dispute about ‘what Keynes really meant’. Some observers felt that this question was beside the point:

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. (Allais, 1993 p. 70), see also (Laidler, 1999 p. 281)

            Whatever the reasons, the Keynesian camp failed to rectify the incongruence in a satisfactory manner. What we had, then, before the latest financial crisis occurred, was, roughly expressed, a perfectly formalized neoclassical theory with no real-world content on the one hand and an assortment of plausible down to earth approaches with no sound − not to speak of a common − formal basis on the other.

            Referring to the crisis Leijonhufvud summed up: ……………

You may download the whole paper at: http://www.paecon.net/PAEReview/issue56/Kakarot56.pdf

  1. paul davidson
    March 11, 2011 at 7:06 pm

    your view of Keynesianism represents the Samuelson and Hicksian “simplification. I got Hicks to admit in print [JOURNAL OF POST KEYNESIAN ECONOMICS] thaT ISLM did NOT represent Keynes’s theory. In my book, THE KEYNES SOLUTION, I quote Paul Samuelson who says he found Keyner’s GT “unpalatable” and incomprehensible asnd therefore he ,merel;y assummed Keynes was a WAlrasian system with fixity of wages and prices —

    If you want to know Keynes’s GT read my boom or myother book in Paalgrave’s Great Thinkers in Economics ” entitled JOHN MAYNARD KEYNES./.

    Keynes was not againdt axioms — but as he says in the preface to the Germ,an edition of the GT –he was against the RESTRICTIVE axioms of classical theory. As I provve Keynes over threw (10 the neutral money axion, (2) the ergodic axiom, and (3) the gross substitutioon axiom as be inapp;licaable between liquid assets and real assets.

    Paul Davidson”

  2. Dave Taylor
    March 12, 2011 at 2:13 pm

    Agreed, Paul, but that is to miss the point, as Egmont’s comment wasn’t anti-Keynesian. More nearly to the point was that “Keynes had no desire that the particular forms of his ‘comparatively simple ideas (…) should be crystalised at the present state of the debate’.” Keynes was wise, for unfortunately he died in 1946. Two years later, in the fields of communication and control, Shannon and Weiner invented dynamic error correction and cybernetic [steering] logics, and it became possible to see that Keynes’ General Theory was in effect anticipating one of the most important results of these: that side-effects before errors have been corrected build up, and need to be corrected separately.

    In 1938 Shannon had realised that the electrical switching circuits of the telephone exchange he was working on were physically performing logical operations. From this developed electronic computers, which unlike Turing’s Machine, are real, go wrong and depend on Shannon’s 1948 error-correcting logic to work reliably. All the evidence (backed up by the physical theory of electronics) points to humans being self-steering entities and error-prone computerised communication systems, and around 350 years after Aristotle invented axiomatic formal logic, Christianity was already offering the requisite strategy for dealing with our failings: forgiveness (so we don’t despair of them), repentance (resetting our direction), and restitution (repairing the damage).

    The snag, of course, was that Adam Smith’s mentor, David Hume, was an unscientific axiomatic atheist, and Smith himself was a persuasive advocate of specialisation. After 250 years of them, specialist politicians and economists (whether self-righteously “orthodox” or heterodox doesn’t seem to matter) don’t live in the real world where error correction logic has been rediscovered by information scientists and within a lifetime transformed our technical milieu.

    So, I am entirely with Egmont on this. In economics it is time to scrap the lot and start again, this time with an up-to-date and physically grounded understanding of language, logic and mathematics. (Wolfgang Drechsler’s comments at PAER56 pp.45-57 are relevant on the primacy here of language).

    In fact I experimentally developed that understanding and conclusion by writing programs interacting with users and computer error detection mechanisms in the scientific language Algol68-R. As long ago as 1984 I had interpreted Egmont’s True(1) and True(2) as “computes true” and “no errors detected”, and realised that Truth as probabilistic certainty needs to be hung on the cross of Cartesian coordinates, i.e. represented by a complex number (0,1) rather than a simple 1.

    Now to the point. It is not enough to SAY “start again”, one actually needs to do it. And it has not been enough for ME to do it, for the scenario opened up by circuital logical and a Copernican revolution in the understanding of money has stayed in my head for want of economic specialists willing to listen to and discuss things I don’t know how to say in ways they will find immediately intelligible. It takes two to tango.

  3. March 12, 2011 at 3:36 pm

    @Dave Taylor, “David Hume, was an unscientific axiomatic atheist”. What has being an atheist got to do with this, unless you consider it a term of abuse? It sounds a very strange combination of qualities to me.

  4. Dave Taylor
    March 12, 2011 at 9:26 pm

    Carol, David Hume was writing two hundred years after the Reformation in Britain,
    when the positive Christian ethos of mutual love and forgiveness had not merely been flouted by macho rulers in practice but confused by Calvinists in particular reverting to an Old Testament ethos, culminating in Thomas Hobbes’s theory that we are motivated only by fear, the natural state of affairs being not love but [class] warfare. I’ve accepted elsewhere that, given the turbulent religious background in Scotland, I am not surprised Hume became an atheist, and in those dangerous times had to express his position subtly. My point here was that while he seems to have been familiar with the axiomatic Aristotelian logic celebrated by Scholastics, he was not familiar with what I had just described as the error-correcting logic built into Catholic confessional practices. There was nothing abusive in that.

    What I was surprised by (as a trainee scientist way back in 1958: this is no superficial judgement), was Hume’s misrepresentation of both the catholic and scientific positions, about neither of which he had first-hand knowledge. Much sooner after the Reformation, Baconian science had been about taking things to bits to see how they worked, its still Christian motivation being to develop new trades in which the numerous people then dispossessed would be able to earn a living. Soon after (the Christian) Newton had died, Hume argued, from his method being to deduce mathematical laws from repeated plots of observations as points on a graph, that that is what science does. Asserting the (at the time irrefutable) axiom that we can only know what we can immediately sense, it seems to follow that science cannot confer knowledge of entities like orbits, forces, moral imperatives and God. Scientists in the positivist Anglo-American tradition seem never to have understood the significance of Kant realising the significance of scientific and moral concepts (like Cartesian coordinates, force, self-defeating behaviour and complex truth) enabling us to UNDERSTAND, direct and manipulate change, not merely KNOW dead records of the past.

    My three word summary background may to you have seemed “strange”, Carol, but is proverbial that, to those not familiar with them, facts are often stranger than fiction. I am interested in why they caught your attention. I am disappointed that they diverted your attention [or allowed you to divert attention] from the topic under discussion: why in economics we should “scrap the lot”, and how to go about “starting again”.

    At this point it is perhaps worth recalling A N Whitehead’s famous advice. “The art of reasoning consists in getting hold of the subject at the right end, of seizing on the few general ideas which illuminate the whole, and of persistently organising all subsidiary facts round them. Nobody can be a good reasoner unless by constant practice he has realised the importance of getting hold of the big ideas and hanging on to them like grim death”.

    Egmont’s distinction between True(1) and True(2) is one of those “big ideas”. It corresponds to the insight that revolutionised my own understanding of economics, which is why I have been trying to contribute to this discussion.

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