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Physics and economics

Lars Syll

cover_frontFrom the times of Galileo and Newton, physicists have learned not to confuse what is happening in the model with what instead is happening in reality. Physical models are compared with observations to prove if they are able to provide precise explanations … Can one argue that the use of mathematics in neoclassical economics serves similar purposes? … Gillies‘s conclusion is that, while in physics mathematics was used to obtain precise explanations and successful predictions, one cannot draw the same conclusion about the use of mathematics in neoclassical economics in the last half century. This analysis reinforces the conclusion about the pseudo-scientific nature of neoclassical economics … given the systematic failure of predictions of neoclassical economics.

Francesco Sylos Labini is a researcher in physics. His book is to be highly recommended reading to anyone with an interest in understanding the pseudo-scientific character of modern mainstream economics. Turning economics into a ‘pseudo-natural-science’ is — as Keynes made very clear in a letter to Roy Harrod already back in 1938 — something that has to be firmly ‘repelled.’

  1. Ken Zimmerman
    April 18, 2016 at 4:46 am

    In “After Method:Mess in Social Science Research” John Law tries to sum the methods problems that face social scientists. Perhaps to their chagrin economists are social scientists. And they face these problems. Reading Law can help I hope shake up their thinking.

    “If much of the world is vague, diffuse or unspecific, slippery, emotional, ephemeral, elusive or indistinct, changes like a kaleidoscope, or doesn’t really have much of a pattern at all, then where does this leave social science? How might we catch some of the realities we are currently missing? Can we know them well? Should we know them? Is ‘knowing’ the metaphor that we need? And if it isn’t, then how might we relate to them? These are the issues that I open up in this book.
    But one thing is sure: if we want to think about the messes of reality at all then we’re going to have to teach ourselves to think, to practise, to relate, and to know in new ways. We will need to teach ourselves to know some of the realities of the world using methods unusual to or unknown in social science.
    Here knowing would become possible through techniques of deliberate imprecision. Perhaps we will need to rethink how far whatever it is that we know travels and whether it still makes sense in other locations, and if so how. This would be knowing as situated inquiry. Almost certainly we will need to think hard about our relations with whatever it is we know, and ask how far the process of knowing it also brings it into being. And as a theme that runs through everything, we should certainly be asking ourselves whether ‘knowing’ is the metaphor that we need. Whether, or when. Perhaps the academy needs to think of other metaphors for its activities – or imagine other activities.
    Here the problem is not that our research methods (and claims about proper method) have been constructed in a specific historical context. Everything is constructed in a specific historical context and there can be no escape from history. Rather it is that they, or at least their advocates, tend to make excessively general claims about their status.
    This is the crucial point: what is important in the world including its structures is not simply technically complex. That is, events and processes are not simply complex in the sense that they are technically difficult to grasp (though this is certainly often the case). Rather, they are also complex because they necessarily exceed our capacity to know them. No doubt local structures can be identified, but, or so I want to argue, the world in general defies any attempt at overall orderly accounting. The world is not to be understood in general by adopting a methodological version of auditing.7 Regularities and standardisations are incredibly powerful tools but they set limits. Indeed, that is a part of their (double-edged) power. And they set even firmer limits when they try to orchestrate themselves hegemonically into purported coherence. The need, then, is for heterogeneity and variation.”

  2. April 19, 2016 at 9:35 am

    Where advanced Heterodoxy — represented by Steve Keen — took the wrong turn
    Comment on Lars Syll on ‘Physics and economics’

    “… economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (Schumpeter, 1994, p. 827)

    Roughly speaking, the economic omnibus contains four sects: (i) Walrasians, (ii) Keynesians, (iii) Marxians, and (iv) Austrians/Others. Because they contradict each other, as a matter of logic, only one can be true yet all can be false.

    Heterodoxy comes in different flavors, but normally it means approaches (ii) to (iv) in opposition to Orthodoxy (i). Constructive Heterodoxy goes one step further and proves that all four approaches are false, that is, traditional Heterodoxy (ii) to (iv) also. In other words, after more than 200 years there is NO scientifically valid economic theory. Economics is a failed science. Economic policy guidance is worthless or even counter-productive.

    A false theory is never obviously false but contains propositions that are partially true, commonsensical, descriptively correct, realistic, or plausible. Moreover, a false theory is corroborated by suitable evidence/examples and is rhetorically fortified with widely accepted platitudes or tautologies. False theories contain many elements that are convincing at first sight. This is the main reason why they can survive for a long time: “The truth is, most persons, not excepting professional economists, are satisfied with very hazy notions.” (Fisher, quoted in Mirowski, 1995, p. 86). This is why social reality consists of 99 % storytelling and 1 % scientific knowledge.

    The common denominator of Heterodoxy is that Orthodoxy is unacceptable. Starting with this broad consensus, there are different ways to proceed. Here we follow the path of Steve Keen. His approach is one of the most advanced in the heterodox camp. He has gone through extensive debunking of Orthodoxy and he has correctly identified the methodological root cause of obvious failure.

    Orthodoxy is committed to methodological individualism. This is the foundational error/mistake. After more than 140 years since Jevons/Walras/Menger the representative economist still has not gotten the point that the formal foundations of Orthodoxy are defective. The microfoundation approach is defined by six axioms (Weintraub, 1985, p. 109), which have been loosely summarized by Krugman as “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point”.

    This must be taken as the confession of a confused mind (2013) because the starting point is provably false and this requires a paradigm shift from microfoundations to macrofoundations (see link #1).

    Each theory/model is built upon a set of foundational propositions a.k.a. axioms. Steve Keen follows the example of Goodwin and chooses ‘a logically incontestable starting point’ which consists of three elementary definitions. Then he goes on to build a complex simulation upon these foundations by adding variables and functions.

    Keen’s approach is methodologically correct, except for the fact that his definitions are still not elementary enough. Because of this, they have to be replaced by deeper macrofoundations as follows.

    (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.

    These premises are certain, true, and primary, and therefore satisfy ALL methodological requirements. The new axiom set contains NO NONENTITIES like utility, maximization, or equilibrium. For the graphical representation of the absolute formal minimum set see #3.

    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. These details are not needed at the beginning.

    Under the conditions of (i) market clearing and (ii) budget balancing in each period the price is derived as P=W/R (1), i.e. the market clearing price is in the most elementary case equal to unit wage costs. This is the elementary form of the Law of Supply and Demand which, in a second step, has to be generalized for an arbitrary number of markets.

    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 invariably zero. So, the next question is where does profit come from?

    All changes in the system are reflected by the market clearing price. The most elementary economy is REPRODUCIBLE for an indefinite number of periods under the interim condition of no external limitations.

    The time evolution of any variable is formally given by the 4th axiom (see link #4), which is nothing other than the familiar mathematical growth formula (the three dots indicate a DISCRETE rate of change, e.g. 3,7 %, in contradistinction to the first derivative which is usually symbolized with one dot).

    With the final step we again depart from Keen as we do NOT introduce deterministic functions (like the Phillips curve) because at this early stage of the analysis we do not posses such functions. What has to be strictly avoided is the usual assumptionism.

    At this stage there is only one legitimate assumption about the rates of change of the independent variables: “The simplest hypothesis is that variation is random until the contrary is shown, the onus of the proof resting on the advocate of the more complicated hypothesis (…).” (Kreuzenkamp et al., 1995, p. 12)

    Now, the minimal set of premises is complete. The four axioms and the random rates of change formally constitute the simulation of the elementary consumption economy (see link #5) which is the formally correct starting point of economic analysis. The exemplary outcome of a simulation is shown in #6.

    Note, that NONE of the ridiculous behavioral assumptions (utility, maximization, bounded rationality, rational expectation, equilibrium, etc.) is applied. For a start, the simulation yields a drifting consumption economy that neither collapses nor explodes nor approaches an equilibrium. The elementary consumption economy simply evolves with a balanced budget and a cleared market. Note in passing that the dynamic properties of Keen’s simulation of the capitalist economy are ultimately determined by his assumptions of deterministic functional relationships. These assumptions are methodologically inadmissible.

    For more details about the axiomatically correct and stock-flow consistent price, profit, money and market theory see (2015).

    Conclusion: Orthodoxy is a failed approach. Constructive Heterodoxy goes beyond debunking and dead-horse beating. The paradigm shift consists in the move from microfoundations to macrofoundations. The correct macrofoundations are given with the structural axioms A1 to A3. Strictly speaking, current economics consists of Constructive Heterodoxy. Orthodoxy and traditional Heterodoxy is manifest scientific garbage.

    Egmont Kakarot-Handtke

    References
    Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL http://ssrn.com/abstract=2207598.
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350.
    Kreuzenkamp, H. A., and McAleer, M. (1995). Simplicity, Scientific Inference and
    Econometric Modeling. Economic Journal, 105: 1–21. URL
    http://www.jstor.org/stable/2235317.
    Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
    Schumpeter, J. A. (1994). History of Economic Analysis. New York, NY: Oxford University Press.
    Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

    #1 ‘From microfoundations to macrofoundations’ http://axecorg.blogspot.de/2016/
    04/from-microfoundations-to.html
    #2 YouTube, Steve Keen, ‘Transcending the Lucas Critique with Minsky’ https:
    //www.youtube.com/watch?v=RaDRu9ZSNBA/#t=9m38s
    #3 Wikimedia, The pure consumption economy with market clearing and budget
    balancing https://commons.wikimedia.org/wiki/File:AXEC31.png
    #4 Wikimedia, Discrete time evolution https://commons.wikimedia.org/wiki/File:
    AXEC10.png
    #5 Simulation, Download of the Excel spreadsheet from Dropbox https://www.
    dropbox.com/s/027esf28xj5v5so/AXEC%20Basic%2001.xlsx?dl=0
    #6 Wikimedia, Exemplary depiction of the drifting consumption economy https:
    //commons.wikimedia.org/wiki/File:AXEC76.png

    • April 20, 2016 at 4:08 am

      Let me suggest another way to do this. The beginning is nothing but possibilities. Nothing exists until it’s built. Your approach is like beginning with the two-story stucco house in place with the first question how should we furnish it. What we know is there are many possible worlds that can be made and many possible ways to build them. This is equally the case for things that come to be known as economic as for things that come to be known as religious, scientific, government, family, etc. So the place for economists to begin, assuming they want to be scientists is observation. Observe what is being build and how it is being build, and the way that building work is explained (given meaning). And like other scientists economists can then “guess” at prior and next steps in the building and explaining process. And then test these guesses (theories is as good a word as any) by comparing them with additional observations. However, this science is a lot more complex than physical sciences since the objects of observation are often not just aware they are being observed but can change what they want to build and how they want to build it based on just about any event, including being observed. This is science. What you suggest is just more ivory tower speculation. Not only not science but not very useful for any job.

    • April 21, 2016 at 9:35 am

      Just a dissident view. Your axioms a0-3 tho correct are perfectly compatible with or susceptible to or phraseable in terms of utility, equilibrium, and maximization.

      It can be done via either standard Lagrangian-Hamiltonian mechanics or maximum entropy method.

      (These can be shown to be equivalent—-this view is sort of new and even controversial —eg see Verlinde ‘entropic gravity’ on arxiv, though it goes way back to Fisher’s Fundamental Theorem in theoretical biology. (G H Hardy of number theory —friend of Ramanujan— is related to this concept—hardy weinberg equilbrium, a quadratic equation as innaplicable to the real world as anything—just diploids with no intereractions–they called this ‘bean bag genetics’ ).

      Fisher (of t-test, etc.) likened it to the second law of thermodynamics, while others said it was a newtonian deterministic system. Nowadays, or some current thought, holds that these views are indistinguishable and mathematically equivalent . I’ll give one reference–Ornstein and Weiss BAMS 91–bulletin of mathematical society of america. I have seen only 3 economics professors reference this article but its almost 20 years old–part of ergodic theory. ).

      I always wonder regarding axiom a-4 what the 3 dots meant. Newton used one dot, Einstein used 2 (invariances under accelerations) , and jeng – ping hsu used 3 dots. see wikipedia special relativity alternative formulations , or his book 2006 ‘a broader view of relativity’ j p hsu (u mass amherst).

      (as an anecdote one person i worked under moved to amherst college to be president, but then had a heart attack and died.)

  3. April 20, 2016 at 11:52 am

    I needed a holiday from all this, but guess what: I met it all again at the sea-side in its traditional sea-side form of a Punch and Judy show. Through this economic analogy – multi-layered, like Bhaskar’s “Realist Theory of Science” but unlike Egmont’s functionless and internally undifferentiated families and firms – children are taught that Mr Punch not only beats the baby and the wife who is bringing his breakfast and the policeman who comes to remonstrate with him, but while he is doing so the crocodile (cf. money lender?) comes and steals his sausages! Only his friend is able to calm him down, pointing out he has had a rather exciting day, and perhaps needs to go home and have a rest.

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