ET1% — Economic Theory of the top 1%
This is a comment that Asad Zaman left on Lars Syll’s post Mainstream economics — a pointless waste of time, but it deserves a post of its own.
My view is that economics does perfectly what it is designed to do. It is a MISTAKE to think that conventional economic theory is WRONG. In order to make progress, it is essential to understand the function of economic theories.
1. Every economic policy hurts some groups and helps others
2. No group has sufficient POWER to ENFORCE policies favorable to them.
3. Groups with power MUST somehow create consent among a majority to enact policies favorable to them. If they do not do so, then policies against their interests will be enacted in a democracy.
4. People judge policies according to their THEORETICAL IMPACT, since no one can actually foresee the future. This means that policies are not evaluated as good or bad according to reality, but according to how widely accepted theories predict their impact (for a vivid example, consider BREXIT)
5. Thus the elite, the top 1%, are faced with the necessity of creating theories which show that policies which favor their interests are actually benefical for all, or for a majority. Let us a label a theory to be ET1% — an Economic Theory of the top 1% — if it shows a policy to be favorable for the majority, when in fact the policy actually favors the top 1%.
7. Now if we consider conventional economic theory, it is easy to show that nearly all of it is ET1% — it is DESIGNED to prove that policies which favor the top 1% are beneficial for all.
NOW LET US consider dominant economic theories and models in the light of this analysis.A: Consider the DSGE model, which has only ONE actor. By aggregating over all agents, we ensure that policies which favor the top 1% will appear to favor the whole nation.
B: Consider the use of GNP per capita. It has exactly this feature — a policy which creates more wealth for the wealthy will appear as beneficial for the whole nation.
C: Consider the principle of methodological individualism. By methodologically failing to consider the group of wealth owners, laborers, and other social groups, we make it impossible to discover what is happening to the economy.
D: Consider the QTM quantity theory of money. By declaring money to be a veil, we make it impossible to think about the power of money creation, and how it enriches the wealthy, at the expense of the rest.
E. Consider the Solow Growth model. It says that the best route to highest growth is by REDUCING consumption and increasing capital. What will happen as a result? Laborers will be starved and surplus will be chanelled into the hands fo the capitalists. All this is done in the name of HELPING THE POOR, since high growth will result in enough product to enable the feeding of the poor — of course this always remains a distant goal to be achieved in the future.MANY MANY MORE examples can be given. It is clear that ET1% does extremely well what it is designed to do: to deceive the majority into agreeing with, accepting, and voting for policies which actually harm their own interests, and help the top 1% get even richer. My earlier post on the The Keynesian Revolution and the Monetarist Counter-Revolutionclarifies this perspective on economic theories in the historical context of the 20th century.
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D: Consider the QTM quantity theory of money. By declaring money to be a veil, we make it impossible to think about the power of money creation, and how it enriches the wealthy, at the expense of the rest.
Money is, of course, more than a veil. The theory that it is merely a veil ignores the reality that to consume requires having the monies to consume. the veil theoretics implies that the distribution of the ability to consume is irrelevant to human welfare, or, for that matter, the physical and psychological welfare of the group at the moment or over time. Human beings must ‘consume’ to live … which implies that the distribution of the ability to consume is important to human welfare overall, and not merely a matter of optimizing purchases given one’s ‘preferences’.
Money is not a veil if only because what one can afford to purchase has no relationship at all to what one can afford to purchase to get by or do better than just get by. Indeed, not getting by is a serious, if ignored problem, in existing theory.
As the introduction states, this post is a repeat of a comment on https://rwer.wordpress.com/2016/06/29/mainstream-economics-a-pointless-waste-of-time/
Readers will find it makes more sense to read “Mainstream economics a pointless waste of time” (the link) including its comments.
I agree with Asad , and think this should be obvious to everyone. I mean , we expect the elites to wear fancy designer fashions and drink fancy designer bottled water to enhance their lives , so why wouldn’t we expect them to have assembled a bunch of fancy designer theories to do the same ?
It’s not just ET1% , either. They also have FPT1% and S/CT1% and TC1% ( Foreign Policy Theory , Surveillance / Control Theory , Terror and Crisis Theory ) and many more. All of the apparent system failures , incompetence , and general chaos we see all around us is just that – apparent.
The reality is that most of the plans of the 1% unfold almost exactly as their theories and models predict ( as do the clueless perceptions of the 99% ).
It’s quite impressive , really. But it needs to stop.
I don’t much believe in conspiracy theories — in this case that economic theory is formulated to serve the interest of the top 1% and they are involved in the conspiracy. I believe that theory formulation is an academic exercise and that its failings have to be sought out in academia — in this case in a mind set of neoclassical economics that has been institutionalized in business schools and economics departments. To settle the problem is an academic exercise — deal with the shortcomings of economic theory in the places where it is formulated — in academia. Academics do not deal with reform so nonacademics will have to lead the campaign to reform the teaching of economic theory. I never see anybody on this blog seriously discuss how change can be accomplished in the teaching of economics in academic institutions. Conspiracy theories about the need to overthrow the stranglehold of the top 1% on our minds won’t help. (a repeat of my comment on Asad’s)
PS. I have discussed how to change; it came up in the discussions about the Rana Foroohar Phenomenon. Nobody paid any attention.
Conspiracy is a prudent first assumption about actions of the Other, perhaps all ‘politics’ is just that, a kind conspiracy. Everything else is just telling the thruth, but doing that is no longer politics. But I understand that over-eagerness to quantify the conditions, outcomes and conspirators can go far into the realm of fantasy, and that is, I also believe, counterproductive for resolving the undelying problems. Every problem where the variables are indeterminate must rely for solution of some theorising, and so every criminal investigator must be at heart a conspiracy theorists. That is the first step of the Popperian paradigm of presenting a conjecture and then seeking a refutation. The process collapses of course if we only make conjectures but do not also investigate possible refutations of our conjectures. As thinkers, philosophers, economists, it is part of our discipline to endeavour to remain rational, to respect the calssical laws of logic (unless we are brilliant enough to show that we can avoid them, and I personally challenge anyone who thinks they can do it). Asad is p HAP’s overstepping the mark by making some now symbolic references about the 1%, but the essence of his argument is at least okausibke, which is more than most of our ‘democratic’ leaders can claim.
@blocke: That corruption exists is not a conspiracy theory. That theory formulation is an academic exercise not materially affected by powerful outside interests is a hard formulation to defend in economics. However imperfect or debased in transmission, the economics taught in, the books written and widely read during the 1940s & 1950s in the US & UK were scientifically superior, logically and empirically, to what succeeded them, especially since the turning point of the 1970s in academia and in global practice (in a phrase, “Full Employment Abandoned” h/t Mitchell & Muysken). This is hard to explain purely by internal academic reasons.
BTW, I confess to being curious if you saw my comment at The naiveté of science as the history of Ideas made some time after lively discussion had ended.
I do agree that there could be more ideas for accomplishing change and less complaining here. A common suggestion, which I agree with entirely is to teach the history of economics, much, much more (at least as much as it once was, when there was less history to teach :-)). One of my teachers published the ultimate (6th?) edition of a textbook – which he originally wrote to win a bet that he could do it in one weekend- which was identical to that first edition. I am not sure about his exact meaning there, but it might be an example to follow in economics. :-)
Two questions for the blocke
A: Is Michel Foucault’s idea of Power/Knowledge a conspiracy theory?
B: Have there never been any conspiracies by the rich to extract surplus from the rest?
Bonus question: Have you seen John Kenneth Galbraith: The Economics of Innocent Fraud?
Michel Foucault and Postmodernism in general is conspiracy theory. since it blames the ideology of dominant elites for shaping the world to their advantage. I have considered Postmodernists to have engaged in the height of irresponsible behavior, since they undermined faith in liberal arts studies in academia, thereby fostering, if perhaps inadvertently, the decline of the humanities in education, thereby furthering economics and business studies. Today, to some extent as a result of the postmodernist critique of the Enlightenment tradition, we have students graduating who are completely ignorant of the liberal arts and history. Foucault and Postmodernists were what Spiro Agnew called “nabobs of negativism.”
Of course, rich screw the poor all the time, but when we use language, we need to understand the pitfalls of collective nouns that lack the necessary precision to clarify situations in the real world. ET1% lacks precision.
“Bonus question: Have you seen John Kenneth Galbraith: The Economics of Innocent Fraud?”
I hadn’t. https://en.wikipedia.org/wiki/The_Economics_of_Innocent_Fraud provides a helpful summary.
Asad’s thread being significant enough to post, I’m bringing forward the constructive comments on what to do about it, including the Foobar one Bob Locke referred to.
Dave Taylor on June 30, 2016 at 9:38 am
Very well put. This takes us back to the “Why?” of Egmont’s original proposition, with which I heartily agree: it is time to “Scrap the lot and start again”. Start with a minimum of two active processes having interactions between them rather than the single agent of DSGE.
Actually, I did that a long time ago, with a great deal of success other than being listened to and enabled to develop understanding by questioning and dialogue. “There are none so deaf as those who don’t want to hear”, like the “grown-ups” frightened of Chinese because they don’t already understand it. So Jesus said: “Unless you change and become like little children you will never enter the kingdom of Heaven”. (Mtt 18.3).
Bob Locke on June 30, 2016 at 9:11-29 am [See above: already reposted]
Bob Locke on May 19, 2016 at 7:57 pm
The Rana Foroohar Phenomenon offers a way for economics to break out of the impasse in which it finds itself. That impasse we all recognize as the inability of economics to make progress as a discipline because it is under the control of a stubborn elite that refuses to discuss the shortcoming of neoclassical economic, thereby, blocking the way to reform that is essential to solving the social crises currently confronting American society.
The RF phenomenon amounts to a use of media, in this case Rana’s book, Makers and Takers, and her presence on Time and television, to break academic resistance to reform. The success depends not only on swaying public opinion in general to confront and break the hold of the neoclassical economics establishing over the discipline, but in convincing those within the university community (presidents, vice-presidents, deans, and departmental chairs) who shape curricula to put pressure on obstinate economists in their citadels to reform research and teaching in economics in community responsible ways that media proselytizing, i. e., Makers and Takers, advocate.
Dave, you reproduce my comment on the
Rana Foroohar Phenomenon, which was intended to guide economists into a useful discussion about how changes can be wrought in the way economics is researched and taught. So what do we get from our bloggers, more comments about whether economics is or is not a science and whether neoclassical economics is real in the real world. These subjects have been talked to death. I understand that economists unlike managers are not concerned with bringing about change within organizations, but they are not even interested, if they are not going to foster change in academia themselves, in discussing how a change in the teaching and research can be brought about by others. Telling us EKH that we have to kick everybody out of the discussion who learn from history and social science is exactly what the neoclassical economics said and did after WWII. Such arrogant scientific determinism is the hobgoblin of tiny minds.
It seems to me that socio-economic elites and the economic policies that maintain or increase their status consider themselves inexpendable because they and the economists whose policies support them rely on ‘trickle down’ to accommodate the poorest echelons of the population. Where that fails, as it so often does, the safety net of social care assuages any troubled consciences. Yet economic policies that fail to achieve sufficient trickle down, concentrate wealth ever more in the hands of the richest. So the top 1% of classical economists are willingly concentrating wealth in the hands of the top, say, 1% of actors in the hope that it will bring overall benefits.
Centuries ago the geocentric myth was held in place by religious elites whose position would have been seriously undermined should Galileo’s subversive writings have been allowed to gain acceptance. Economists, political and economic elites enjoy a similarly powerful and entrenched position simply because they are in charge – the one in policy design, the second in its administration, and the third in wealth creation. Nothing is likely to shake this triple hegemony until economists and politicians recognise the urgent need for a paradigm shift in economic thinking. In my view the present status is maintained because it is ‘safe mode’ – nations accumulate all sorts of social and environmental problems but the show generally stays on the road with the mirage of a trickle down utopia leading it on donkeyandcarrot-wise (excuse the mixed metaphors).
The interesting question is, not how did we get to become enslaved to this ‘geocentric’ set of models, that’s just the inevitable and often repeated march of human history down wrong paths, but where do better models come from. How do they gain traction in a world dominated by those who benefit so much from the existing models?
The answer, it seems to me, is to go back to basics. We have to agree what we know and what we do not know as empirically true. This is the lab bench approach – the scientific one – and primarily it means revisiting the evolution of economies, which turn introduces anthropology into the equation. Yet if we are to find empirical truth behind even those anthropological phenomena we have to go deeper still – to the genes that regulate human behaviour. This may look off-track, but it surely isn’t. Anthropology and economics are inseparable. We are a gene-controlled species whose behaviour is unerringly directed, like all other living organisms, towards three fundamental objectives: reproduction, survival and the acquisition of resources. Money having tokenised resources in recent history, it has become the central focus of the third of those genetic drives – a third imperative if you like. Economies are therefore virtual ecosystems, with actors as species.
Here is a new model to work on therefore – all around us, in nature. Nutrient flows, population dynamics, power dynamics, symbiosis, competition, evolution, resource management – the list goes on. Managing human economic behaviour towards the environment is the subject of my new book, Junglenomics, (www.ecosystemic-economics.com) but I see no reason why natural principles could not be introduced into classic economics as well. EO Wilson called this melding of scientific disciplines “consilience”. In my view the scientizing of economics cannot come a moment too soon.
Asad seems to be describing an ideology. I believe that much of the criticism is directed at the theory of neo-classical economics, e.g. many of the assumptions are farfetched, the demand side of the system is not well characterized, etc.
Politics, storytelling, and science
Comment on Asad Zaman on ‘ET1% — Economic Theory of the top 1%’
What told Marx us about economics?: “In the domain of Political Economy, free scientific enquiry meets not merely the same enemies as in all other domains. The peculiar nature of the material it deals with, summons as foes into the field of battle the most violent, mean and malignant passions of the human breast, the Furies of private interest.” (1906, M.10)
What tells Asad Zaman us?: “Now if we consider conventional economic theory, it is easy to show that nearly all of it is ET1% — it is DESIGNED to prove that policies which favor the top 1% are beneficial for all.”
What tells YouTube us about economics, politics and all the rest? “Everything Is A Rich Man’s Trick.”
And finally, what tells us science? “Apologetics may be a laudable objective. Its practical importance is unquestioned. People need to be shown that the institutions of their own society are good, those of others bad. But there is no place for apologetics in science. Scientific economics inquires only into the How and Why, not into the Good or Bad, of what is. From the scientific point of view preoccupation with Good and Bad is worse than useless since it not only fails to illumine anything but keeps the lightbeam of inquiry from being turned in directions where answers to significant questions can be found.” (Murad, 1953, p. 2)
What is the underlying problem? Everyone of us can only have personal experience of a tiny section of space and time and it is not at all certain whether we interpret this personal experience correctly. The rest of reality consists of extrapolation of limited experience, second-guessing of causes and motives, and of what society tells us. Society consists of family, peers, neighbors, teachers, philosophers, priests, gurus, artists, government, business, and the media.
Our view of reality is the result of rather limited personal experience and storytelling. The bad thing is that we are sometimes confronted with facts, events or claims/opinions that do not fit into our world view. And this brings up the distinction between opinion and truth.
“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, 1994, pp. 39-40)
What the ancient Greeks called opinion/doxa is roughly the same what Buddha called veil of Maya, what Marx called ideology, what Hollywood calls dream/nightmare, what Bernays called PR/advertising, and what Orwell called mind-control.
Is Asad Zaman’s claim that ET1% influences opinion true? Yes. Is the claim that they influence science in general and economics in particular true? Yes. Can they determine the outcome of research? No, because nobody knows the outcome in advance. All depends on whether scientists stick to the well-defined rules of science. “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack, 1997, p. 1)
Asad Zaman’s claim amounts to the accusation that orthodox economists are fraudsters, that is, that they intentionally produce false theories. This brings us out of science and into the criminal court (see also Lysenkoism on Wikipedia https://en.wikipedia.org/wiki/Lysenkoism).
Heterodoxy stands before this question. We all agree that Orthodoxy is false so (i) let us forget this scientific garbage and focus on developing the true theory (= materially and formally consistent), or (ii), let us bring Orthodoxy to court and prove that DSGE is not a failed approach but a political fraud.
All would be much simpler if Asad Zaman could present the true theory (= materially and formally consistent) of how the actual monetary economy works. In particular I would like to know which one of the four different heterodox profit theories is correct.*
Egmont Kakarot-Handtke
References
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism.
Skeptical Inquirer, 21(6): 1–7. URL http://www.csicop.org/si/show/science_
scientism_and_anti-science_in_the_age_of_preposterism.
Marx, K. (1906). Capital: A Critique of Political Economy, Vol. I. The Process of Capitalist Production. Library of Economics and Liberty. URL
http://www.econlib.org/library/YPDBooks/Marx/mrxCpA.html
Murad, A. (1953). Questions for Profit Theory. American Journal of Economics and Sociology, 13(1): 1–14. URL http://www.jstor.org/stable/3484955.
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and Rationality. London, New York, NY: Routledge.
* See ‘Heterodoxy, too, is scientific junk’
http://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html
This “veil of money” idea seems to come from a realization that “money” is an abstraction and then drawing the incorrect conclusion that an abstraction can have no effect on the “real” economy. But of course this is silly.
Lines of latitude and longitude are also an abstraction and purely the creation of the human mind. No one has ever tripped and fallen over a line of latitude!
A “neoliberal” economist, it seems to me, would therefore argue that they have no actual effect upon navigation! Of course in fact they make modern navigation possible and are essential parts of the system of navigation.
An “abstraction” may have not reality outside of human minds, but human minds are perfectly real things and the abstractions within them are real abstractions. Since human society (which includes “economies”) is run by human minds the abstractions they hold have real effects on society. Obviously the abstraction “money” has a real effect on the economy unless one is so blinded by ideology as to ignore the obvious.
And of course the very idea of an “economy” is itself abstraction from the real world, yet economies certainly seem to have very real effects!
Spot on, Ed. And it seems Egmont as well as neoliberal economists is hooked on the primary significance of observation as against knowing how and which way to look:
“What is the underlying problem? Everyone of us can only have personal experience of a tiny section of space and time and it is not at all certain whether we interpret this personal experience correctly. The rest of reality consists of extrapolation of limited experience, second-guessing of causes and motives, and of what society tells us.”
So, whether or not we know it, there are no true and shareable ways of interpreting experience; and reality being in our head where it is unobservable, there is nothing to observe? Hume’s “Treatise on Human Nature” is only a figment of my imagination, so Egmont cannot have read it and know he is spouting pure Humeanism. He may have a majority of so-called scienitists thinking the same way as he does, but that’s pure Humeanism too.
Add: That was Hume’s recipe for a democracy of the 1% in the 1740’s era of slave owners.
Hold on Dave. While much of what you say is, in my subjective view, reasonable, there is a platform on which we can still ‘objectively’ connect/relate/communicate as subjects, a platform which is the nearest thing we have to the Hegelian absolute. Kant called it transcendental reasoning; Habermas and Apel called it the universal discourse ethics; David Enoch calls it ‘indispensability’, Vellemean calls it ‘constitutive conditions of agency’ : which is basically the set of ontological and moral commitments that each of us must make to exist as individuals, that’s, to exist. From these we can still build bridges, we can still connect and share our meanings and commitments, and that is why we can even talk to each other at all, because the sphere of subjective alienation is not closed: it implicitly relies on all other beings of the same kind that in some way define our being.
Of course I agree with you, Michael. My point was that Hume didn’t. Hume’s “constitutive conditions of agency” (more than a hundred years before the discovery of electromagnetic radiation and its expanation of light) were that if you can’t see something, it cannot be presumed to exist, So God’s spirit and a morality founded in the Natural Law of God’s creation do not exist, hence his “scientific” and “democratic” proposals and his friend Adam Smith’s feeling sympathy but (unlike Chancellor Bacon) not responsibility for the dispossessed.
I’m reasonably familar with Hegel, Kant and Habermas, but probably a bit old to have been introduced to Apel, Enoch and Vellemean. (I’ll look them up).
Refuting Hume, and arguing from the Christian position, Hegel seems to me to be seeing the State in St Paul’s term of “the mystical body of Christ”, engaging within God in the Trinitarian dialectic. (Perhaps it has been his translators and interpreters that have done the conflating). Kant’s arguments about interpretation seem sound but are limited to superficial logic by being almost 250 years before the discovery of digital harware logic and ways of demonstrating what was saying. He and Habermas echo the later Christian interpretation of duty, but what Christ is directly reported as saying bears a very different interpretation. What should I do? “Love God, and your neighbour as yourself”. And a warning: “judge not, lest you pass judgement on yourself”. In other words, Duty is not what is required of us but “what is due” (basically to receive gratefully and to give gracefully); and Law is the Father’s advice, given to free us from making costly errors. Which I suggest is rather more concise and publicly accessible than Habermas, for whom I’m referring to http://plato.stanford.edu/entries/habermas/.
My own version follows Habermas into linguistic considerations, (http://www.eah-jena.de/~kleine/history/languages/Algol68R-UserGuide.pdf) but also grounds them in communication via carriers (e.g. radio) and the physical implementation of Shannon’s digital and error correction logic circuits in both neural and computer systems.
Way down the Habermas article is passage which descibes my personal position as a scientist in a maintainability context rather nicely. “… “theoretical” discourse becomes necessary when beliefs lose their unproblematic status as the result of practical difficulties, or when novel circumstances pose questions about the natural world. ,,, critical testing as combining discourse with experimental actions—as we see in scientific inquiry, which combines empirical arguments with practical actions, that is, field studies and laboratory experimentation”.
Thanks for the interest, anyway. Apologies for my not responding to Bob Locke: my by now unmaintained computer lost the one I had laboriously written when I tried to send it.
Apologies for my initial misunderstanding of your comment. I will read the Algol 68 with great interest, thanks for sharing.
Re Kant, I think he developed a very powerful, perhaps the most powerful method of argumentation, but I agree that his conclusions do not quite follow from his premises. But that is where Habermas and Apel picked up his project and made it more rigorous. I must say that I agree with Habermas’ ‘universal presuppositions of argumentation’ argument (best source: Habermas, Jürgen. Moral Consciousness and Communicative Action. Cambridge: Polity Press, 1990) but he has, I believe rightly, considering what he had to work with, dispensed with the claim to universality of obligation and admitted a degree of contingency, while Apel aimed for the holly Grail of ethics and although he made a brilliant effort (see Apel, Karl-Otto. Selected Essays: Ethics and the Theory of Rationality. Atlantic Highlands: Humanities Press International, 1996) I believe he failed. I will soon be able to share my contribution to this debate, as soon as peer reviewers deem it worthy.
Re Christ, “judge not unless you pass judgement on yourself” is consistent with the Kantian theme “Act only according to that maxim whereby you can, at the same time, will that it should become a universal law”. It basically asserts moral symmetry of all agents. But it gets more interesting with “love God and your neighbour as yourself”, which seems to assert a kind of ‘transcendental’ identity of ‘different’ individuals (and God), and that resonates with most other spiritual or religious traditions. A formal and non-religious version of this claim can be attributed to Badiou, who talks about the degree of existence in a world as a function of transcendental identity of terms. My interpretation is that no two things can be said to exist in the same world unless they have something in common in terms of which they can affect/experience one another. That which is the common of two terms is their degree of transcendental identity, or self members that transcends but also grounds their differences.
I’ll put the Algol manual at the top of my reading list. Thanks.
Erratum: That which is the common of two terms is their degree of transcendental identity, or sameness, that transcends but also grounds their differences.
It is clear that economics profession is corrupted by politics. But is it the influence of top 1% or politics of hate that is the reason?
Why would anyone want to have high unemployment? Think about the negative images associated with unemployed, that they are feckless lazy bums that want to avoid work, smoke weed, avoid responsibility and just generally do the minimum even if they are at work. High unemployment would punish these people by making their life harder. If your worldview is that there are “good” and “bad” people that can easily lead to politics of hate. And on the plus side, if high unemployment keeps inflation in check “good” people will benefit.
Not to even mention all the ethnic hate that is going on in multicultural United States from where all our economic thinking emanates
Unemployment is not deliberate, but the lack of opportunities being available for a working person is. Only when we recognize the cause of these failures to allow everyone a fair chance will there be any better degree of social justice. When more people are employed there is an increase in production and an associated greater amount of money being borrowed so full employment is not going to cause inflation. In fact the greater production efficiency associated with a fully active economy will reduce direct production costs.
George Stigler, a former President of the Anerican Economics Association, once noted that the production of economic theories is like the production of any other good: supply responds to demand. Who demands economic theories and has the money to pay for them? Well, rich individuals, capitalist states, and large corporations. Is it any surprise then that the theories that get produced are those which benefit rich individuals, capitalist states and large corporations?
Hang on – with respect, has all this talk of Kant, Popper etc got anything to do with “real world economics”?
Ed you’re right to highlight the abstract nature of human measurements. Yet while no-one has tripped over a line of latitude they have felt colder the further north of a northern line they travel, and warmer to the south. E=mc2 is an abstract notion too, yet it holds true everywhere (so far as we know) in the Universe. Mathematics time and again shows there to be constants at work in systems of all kinds, including economic ones. Because maths appears to be at the heart of all systems, from biology to economics to astrophysics, the job of economists is to use it to identify equations to improve predictability and thus help impart control within economies. That this so often fails doesn’t necessarily mean the equations are all wrong (though some may be), just that in many cases the interaction between economic forces, which can have extremely complex outcomes just as they can in physics et al, can be very hard to predict.
As with maths, there is both pure economics and applied economics. How economic theory is applied to real life situations is where it can fall down, not least because that application is directed by governments for specific ends and is thus inherently political, subjective and hence fallible, and partly because it may be inadequate in rapidly developing world economies. Whether they adopt the Keynsian or Hyeckian economic approach is an obious example of how UK governments have selected economic policy to meet their political goals, employing a relevant clique of economists to advise them. When they do so they also pick up all the maybe-not-so-clever, or maybe-not-entirely-up-to-date baggage that goes with it.
Almost everyone was blindsided by the economic meltdown of 2007-8, not so much because models were wrong but because they had not been adapted for the global economy. Continuing the theme of my earlier comment (that economic systems are virtual ecosystems) I would point out that ecologists (1) were among those who contributed to a study published by the Federal Reserve Bank of New York in 2007, just before the crunch, warning that while huge sums were spent on assessing the risks of individual investments, very little attention was being given to systemic risks.
Frustratingly for those who took part in this study, little notice was taken of their warning that the loss of diversity caused by globalisation had left the financial system more vulnerable to contagion and failure, as happens in ecosystems.
1. eg. S Levin, Princeton.
Simon, the empirical method of validation is inseparable from transcendental reasoning (the ‘a priori’ logic of presuppositions, implications and performative contradictions/affirmations). Empiricism is always conditioned by definition of observable parameters, which in the absence of their meta-evaluation is reduced to dogmatism. In simple terms, there can be no empirical science without a theoretical dimension, and that dimension is being continuously reconstituted by experience and rational reflection, what in turn affects the meaning of future empirical data. So I find it difficult to reconcile your comments about intentional, subjective actions of governments to achieve specific political goals and the apparent call to pure empiricism in relation to economic ecosystems that are virtually determined by those actions.
But leaving that aside, I can conceive of two likely motivations that drive governments in their failed economic policies. 1) they are actually motivated to destabilise global economy as part of some power play, while at the same time seek to maintain plausible deniability, hiding behind their apparent incompetence (incompetents in public office are rarely held criminally liable), or 2) they are too afraid to make significant structural changes and instead play the game of chairs with the competing economies, waiting for their competitors to blink/fail first, and then blame the systemic collapse on their weaker adversaries and take everything from them by force if necessary. It may be desirable for some governments to accomplish such a reset of economic liabilities via proxy of a weaker competitor, if they believe that the outstanding foreign debt cannot be possibly paid off and thus poses a threat to national sovereignty. This is all speculation off course, but perhaps not entirely implausible considering the power play between USA and China.
Refocusing economics
Comment on Asad Zaman on ‘ET1% — Economic Theory of the top 1%’
All heterodox economists are agreed that orthodox economics is false — but for wildly different reasons. Roughly speaking we have two categories of critique: scientific and politic. When politics is taken out of the picture for a moment then the situation is as depicted on the left panel of the following chart
At the moment we have no true economic theory, i.e. a theory of how the monetary economy works which satisfies the well-defined scientific criteria of formal and material consistency. All other aspects of the situation put aside, the task of Heterodoxy is to move straightforwardly from false to true as indicated by the arrow A. This is called a paradigm shift.
However, if we add the political dimension we complicate the situation and in effect make it INSOLUBLE. Simply put: when we combine the scientific binary true/false with the political binary good/bad and the three main political positions then the matrix of issues explodes as shown in the right panel.
By not keeping the scientific and the political sphere properly apart economic discussion got lost in cross-talk as indicated by the cloud B.
All heterodox economists agree that Orthodoxy is false. Now, it is obvious from the history of science that scientists have produced theories that have later turned to be false or only partially true. Among scientists this has always been regarded as a regrettable lack of serendipity:
“A new idea is extremely difficult to think of. It takes a fantastic imagination.” (Feynman) “But it is all a matter of chance: in order to solve a difficult problem one needs not only understanding but also luck.” (Popper)
With his claim that orthodox economists INTENTIONALLY produce false theories Asad Zaman leaves the scientific discourse, distracts from the point at issue, confuses the discussion, and in effect prevents problem solving. As Schumpeter put it: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”
Every heterodox student needs to be fully aware that economics has always been a mixture of political and theoretical economics. Economists have on the average been more committed to political agenda pushing than to proper scientific research and this is why economics has not produced much, if anything, of real scientific value in more than 200 years. This applies to BOTH orthodox and heterodox economists.
What is needed is the strict separation of science and politics. There is NO other way out of the proto-scientific cul-de-sac of economics.
Egmont Kakarot-Handtke
The moment one defines what the term ‘scientific’ entails, and what are the ‘conditions’ of scientific truth, one are already in the realm of the social, and therefore of the political also. Michael Polanyi had something to say along those lines: “There is no rule – and there can be no rule – on which we can rely for deciding whether the discrepancies between theory and observation should be shrugged aside as observational errors or be recognized, on the contrary, as actual deviations from the theory.” (Polanyi, Michael, and Harry Prosch. Meaning. Chicago: The University of Chicago Press, 1975) Establishment of such a rule is therefore either an arbitrary commitment (and therefore not universal) or is a claim to power. The idea of amoral and apolitical science is at best an instrumental reductionist idea, emergent from the (already political) ideology of materialist absolutism.
This argument can be taken even further. To paraphrase Marshall McLuhan regarding modern (scientific?) rationality: ‘we have confused reason with a particular form of literacy, and rationalism with a single methodology.’ (McLuhan, Marshall. Understanding Media: The Extensions of Man. London: Routledge & Kegan Paul, 1964) A scientist who does not seek primarily to decode one’s implication within the context of epistemic methodology is therefore not really engaged in ‘objective’ science (that is, science per se) but either in empirical mysticism or in totalitarian constructivism, preserving the flawed methodology because the flaw is essential to its function as a system of domination over the conditions of truth. Or a more direct accusation: “Scientists, technicians, and instruments are purchased not to find truth, but to augment power.” (Lyotard, Jean Francois. The Postmodern Condition: A Report on Knowledge. Manchester: Manchester University Press, 1984)
This does not of course preclude scientific research from being internally consistent with the paradigmatic conditions of its truth and potentially useful, but it’s objective or universal truth-value and use-value cannot be ascertain without evaluating consistency of the paradigm itself with respect to the social context in which the universal claims are being made. Pretending that science, insofar as it is understood as an objective and now also normative discipline, can be reduced to pure methodology may be initially comforting, but in the long run it is likely to give birth to a monster. Separation of the two domains can only be tentative, and I agree that at times it is efficient to do so, but the separation can only go so far before an integrated moral and political evaluation of its truth-claims is necessary.
Michael Kowalik
You say: “The moment one defines what the term ‘scientific’ entails, and what are the ‘conditions’ of scientific truth, one are already in the realm of the social, and therefore of the political also.”
This is the Science-of-Man fallacy and it has been made explicit by Hume: “It is evident, that all the sciences have a relation, greater or less, to human nature: and that however wide any of them may seem to run from it, they still return back by one passage or another. Even. Mathematics, Natural Philosophy, and Natural Religion, are in some measure dependent on the science of MAN; since the lie under the cognizance of men, and are judged of by their powers and faculties.” (Hume, 2012, Introduction)
The Science-of-Man fallacy is the methodological foundation of the so-called social sciences which Feynman aptly characterized as cargo cult sciences. Therefore, it is no accident that it is propagated by social philosophers like Polanyi, McLuhan, Lyotard etcetera. Genuine scientists are well aware of the subjective/social element and, because it is a well-known scientific nuisance, they try to minimize it: “Like Planck, Einstein viewed the human element of any physical theory as essentially arbitrary, something that should be purged on realization of the final true theory.” (Mirowski, 2004, p. 159)
Science is (starting with the ancient Greeks) well-defined by material and formal consistency and scientists judge and are judged according to these criteria. These criteria are OBJECTIVE to the highest humanly possible degree. Genuine scientists have NO problem with these methodological essentials but the storytellers of the so-called social sciences always had.
The crucial point is that economics deals not primarily with individual human behavior or society at large (Hudík, 2011). This is the realm of psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory etcetera. Insofar as economics deals with behavioral assumptions like utility maximization, greed, power grabbing etcetera, it is a dilettantish variant of Psycho-Sociology.
This PsySoc stuff, though, has been built into the axioms of Orthodoxy (methodological individualism, constrained optimization, rational expectation and so on). And this explains why economics has never risen above the proto-scientifc level.
Economics has to be redefined as system science. Methodologically, the economic system as a whole has to be moved into the foreground. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the Invisible Hand. Economic analysis has to make the Invisible Hand visible, that is, it has first of all to uncover the objective systemic laws of the monetary economy (2014).
It should be obvious to every heterodox economists that the Science-of-Man methodology has not produced much of scientific value but a lot of sitcom entertainment. As far as economics is concerned McLuhan’s dictum ‘The medium is the message’ certainly applies because the scientific content of economics is zero or close to zero.
Egmont Kakarot-Handtke
EKH stop confusing natural science with economics in your comments. Its rubbish.
“At the moment we have no true economic theory, i.e. a theory of how the monetary economy works which satisfies the well-defined scientific criteria of formal and material consistency.”– Egmont
This quote from the above is simply not true. We do have a satisfactory macroeconomic theory, only many of our bloggers and others too are unwilling or unable to read about it and to recognize its value and truth. After many pains taking years of part-time research and deep thinking, this matter has been established and any doubt put to rest! Believe it or not, macroeconomics is at last a true science and I have proved it! Please write to me for a e-copy of my book “Consequential Macroeconomics–Rationalizing About How Our social System Works” in order to see how I logically and sensibly prove that out beloved and innocent subject is actually an almost exact science.
My theory does include the money side, but to claim without argument that our subject is all about monetary economics is another falsehood! I am getting tired of the many unproved statements (like the money that comes out of fresh or otherwise tainted air) that adorn our comments.
For those who wish to play devils advocate and say I am wrong–well lets see something better to show it! I’m open for correction if anyone has any good ideas.
“Genuine scientists are well aware of the subjective/social element and, because it is a well-known scientific nuisance, they try to minimize it”
I certainly agree with that.
“Science is (starting with the ancient Greeks) well-defined by material and formal consistency and scientists judge and are judged according to these criteria.”
And here the ideological problem emerges: “material consistency”. If you can show me what it is ‘Objectively’ without conflating it with “formal consistency” I would be convinced. But also, you owe us an objective demonstration/proof that “These criteria are OBJECTIVE to the highest humanly possible degree”.
“Genuine scientists have NO problem with these methodological essentials” be sure they simply ignore them, and thus reveal themselves as not true scientists but at best competent technicians. The curious phenomenon is that in recent times it is the scientists who study the fundamental structure of matter became the most imaginative storytellers, and their objectivating ground is a kind of transcendental reasoning and not empirical observation. It is worthwhile to inquire as to why it is so much easier for a biologists to be a grounded scientist than a particle physicist. I suggest that biology is already more socially grounded, more constitutively integral to out identity and everyday meaning than the seeming abstraction of Bosons.
“The crucial point is that economics deals not primarily with individual human behavior or society at large (Hudík, 2011).”
You can never exclude from the economic analysis the social and political conception of ‘value’; you can merely assume it is a constant, but that requires axiomatisation of value, which is rarely adequately done. I am totally for making theories and empirical research based on consistent axiomatic foundations, but scientific and logical rigour demands disclosure of axioms and not their merely intuitive assumption. This, I believe is the weakest link in the ‘science’ of economics, and if it is a science it is always more transcendental (based on a priori logical evaluations of consistency, implication, indispensability) than empirical. The central concept in economics is ‘value’ and its various manifestations and representations are notoriously under-theorised.
But I understand your insistence on the purity of science: we all desire a solid ‘ground’ for our knowing, I only do believe that the problem is not as simple as you present it. I also agree that social ‘scientists’ often overstep the mark, avoiding the empirical and formal altogether. They are not ‘more right’ than scientists, but rather, present a equally exaggerated reaction to the excesses of scientific dogmatism. I am trying, at least for myself, to reconcile the two aspects, towards a higher degree of objectivity.
“This PsySoc stuff, though, has been built into the axioms of Orthodoxy (methodological individualism, constrained optimization, rational expectation and so on). And this explains why economics has never risen above the proto-scientifc level.”
No one is immune to nonsense. We all are, to a degree, irrational. The best we can do is to discipline our one thinking, and in time perhaps the entire discipline will benefit. Bad axioms do not disqualify axiomatisation.
“Methodologically, the economic system as a whole has to be moved into the foreground. The economic system has its own logic which is different from the behavioral logic of humans.”
That’s fine, as long as it is made clear at which points it departs from what we regard as humanity. Again, axiomatisation is a great thing, as long as it is systemically complete and internally consistent.
“Economic analysis has to make the Invisible Hand visible, that is, it has first of all to uncover the objective systemic laws of the monetary economy ”
I very much agree. And that requires axiomatisation and transcendental evaluation of the socially determined inputs. The invisible hand matters only as far as it affects human agents and our system of meanings. These two domains can and must work together, and can be equally formalised.
“It should be obvious to every heterodox economists that the Science-of-Man methodology has not produced much of scientific value but a lot of sitcom entertainment. As far as economics is concerned McLuhan’s dictum ‘The medium is the message’ certainly applies because the scientific content of economics is zero or close to zero.”
That is a fact. But we must not allow bad science to prevent us from doing good science, and rigorously formulating what good science entail, which has non-empirical implications. The dilemma is how to maximise objectivity/universality of claims, and this will be up for debate as long as humanity seeks knowledge and as long as different interest groups seek to leverage definitions/conventions/meanings to their own advantage at the expense of others. Economics is possibly the most vulnerable discipline to politisation.
Michael Kowalik
You say: “I am totally for making theories and empirical research based on consistent axiomatic foundations, but scientific and logical rigour demands disclosure of axioms and not their merely intuitive assumption. This, I believe is the weakest link in the ‘science’ of economics, …”
It seems that you are not aware that the axioms ARE disclosed see ‘How to get rid of the silly Queen’ http://axecorg.blogspot.de/2016/06/how-to-get-rid-of-silly-queen.html. See also my reply to Asad Zaman.
The point is that both the Walrasian and the Keynesian axiom set is provably false. This is why economics has to move from traditional microfoundations and Keynesian macrofoundations to entirely new macrofoundations.
Egmont Kakarot-Handtke
Egmont Kakarot-Handtke,
You write: “The first task of economics is to figure out what profit is and the fact of the matter is that NO socio-cultural economist has figured out this until this day.”
Profit of what? Are you asking for a definition of ‘value’?
“It seems that you are not aware that the axioms ARE disclosed”
Some axioms are disclosed; but most models make structural assumptions which are not axiomatised, and thus problems arise. For example, before we can theorise about profit we must define what are the intrinsic properties of economic value?
You say, “the forever unacceptable microfoundations have to be replaced by macrofoundations”, and I do agree, but I am not clear what is you reasoning behind this conviction. Mine is that money, the token of value, and therefore value in the economic sphere, are quintessentially macroeconomic phenomena, just like meaning and language are quintessentially inter-subjective phenomena. Individual action in the sphere of economics cannot be isolated from actions of others, nor can it be adequately formalised, but inseams we are in agreement on that point.
“Human behavior, tastes, choices, or society have no durable underlying structure”, I agree, “but the monetary economy has and it is given in the most elementary case by A1 to A3. A system can be unambiguously defined.” I disagree that A1 to A3 are sufficient to unambiguously define the system. But saying that, I think we are still on the same page here. I maintain that human behaviour, even if its structure is not fixed, must be somehow integrated into the formal system, otherwise it is unclear to me why the system should still be representative of anything real. I have attempted to do just that (http://www.paecon.net/PAEReview/issue70/Kowalik70.pdf) by splitting the system into a formal subsystem (the modified equation of exchange) and into a dynamic intersubjective subsystem (call it the ‘market’ if you like) and integrated them via iterative feedback loop. The formal parameters do not constitute understanding of the state of the market by only the structure of logical relationships between the formal parameters, whose values are adjusted according to the market rather than define the market. The resulting model is robust enough to accommodate paraconsistency (irrationality, errors) even if it can never achieve perfect equilibrium. One could call it a pragmatic solution.
Michael Kowalik
You ask: “Profit of what? Are you asking for a definition of ‘value’?”
Monetary profit is objective. You can touch it in the cash box or see it on your bank account with an accuracy of two decimal places. Value is a subjective concept. So economics has to deal FIRST with measurable profit and LATER ON with value. Economists did it the other way round and this is like putting your boots on and then to try to get into your trousers. This has never worked and never will. It is simply a dilettantish methodological mistake. And this mistake is built into the neoclassical axiom set which is subjective-behavioral. This is the ultimate root cause of the scientific failure of economics.
In order to get economics out of folk psychology and folk sociology the Walrasian subjective-behavioral axioms have to be REPLACED by objective-structural axioms.*
Iron Rule of methodology: deal first with the objective aspects of reality and then with the subjective aspects. Economics cannot be built upon green cheese behavioral assumptions and nonentities like constrained optimization and equilibrium. ALL models that contain these two concepts are a priori false and this is more than 90 percent of the content of peer-reviewed economic journals.
You say “I maintain that human behavior, even if its structure is not fixed, must be somehow integrated into the formal system, otherwise it is unclear to me why the system should still be representative of anything real.”
Yes, of course. It is all a matter of methodological SEQUENCE: structure comes first, behavior comes second; objectivity comes first, subjectivity comes second. This is what the inescapable paradigm shift is all about. For the consistent formalization of human behavior see (2015).
Make no mistake, it is NOT either structure or behavior, it is structure first and behavior second. This is why economics has to be based upon objective-structural axioms.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Behavior. SSRN Working Paper Series, 2600523: 1–17. URL http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2600523.
* For how this is done see the cross-references New Curriculum
http://axecorg.blogspot.de/2015/04/new-curriculum-cross-references.html
“Monetary profit is objective. You can touch it in the cash box or see it on your bank account with an accuracy of two decimal places.” True. If all you are concerned with (in your formal model) is counting tokens then this is sufficient. But the flipside is that money is only as good as what money can buy, and that does not depend only on distribution of tokens, nor is it entirely subjective even with respect the to the notion of value. While value has subjective aspects it has objective aspects also, at least as objective as acceptance of the tokens of value. Furthermore, not all payments are made with tokens but sometimes with goods, with entitlements, privileges or promises, and these kinds of ‘profits’ might evade your model while influencing the formal variables and sometimes distort entire markets. This would be a good reason for simultaneous integration of subjective, stochastic and objective aspects. Good axioms are of course the foundation, and nobody here claims otherwise, but their usefulness is likely to hinge on that which is formally indeterminate. Nobody claims that false axioms should be used.
The dilemma is rather what are the best axioms and how best to implement them, and that is never as black and white as you seem to present it. Some axioms and methodology might be better for making predictions; different axioms and methodology might be better for specific kinds of economic control, and most economics is not about predictions but about control: we want to know how to make the system work best for our needs, how to make it fair and efficient. The market is not as objective as the Sun that makes life on Earth possible but it is objective insofar that we all make it and remake it together, even if we act against one another. It is our construct, including the objective tokens.
I will read the papers you refer to.
I have read four of your papers. Your model, as it stands now, is obviously too simplistic, based on too many unrealistic assumptions, to be of any relevance to the real world. Your sweeping conclusions therefore strike me as delusional.
The most glaring limitation is that you do not adequately account for new bank-credit (issued at negligible cost) being spent into the economy under realistic conditions of continuous credit expansion, what makes your pricing equation absurdly wrong.
The only positive thing I can say is that your equations, subject to the assumptions you make, seem to be consistent.
Michael Kowalik
You criticize the structural axioms: “Your model, as it stands now, is obviously too simplistic.”
You obviously cannot get your head around the starting problem.* Every analysis starts with premises/primitive propositions/axioms. For axioms the MINIMUM principle holds and this is known since antiquity as Occam’s razor. So, the first methodological task is to find the simplest set of foundational propositions. Simplest in this context means not further reducible. The first thing to notice is that the three structural axioms are not further reducible.
Among scientists simplicity is a significant quality attribute: “Others, the inexperienced students, make guesses that are very complicated, and it sort of looks as if it is all right, but I know it is not true because the truth always turns out to be simpler than you thought.” (Feynman, 1992)
von Mises ― your methodological lamppost ― took the the action axiom as the starting point. Unfortunately, he thereby fell for the same blunder that Neoclassicals fell into when they built upon subjective-behavioral axioms instead of objective-structural axioms.
Krugman is exemplary for his explicit commitment to his axiomatic starting point: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.” With this wrong selection of axioms he readily debunks himself, just like von Mises. There is NO need to check the theoretical superstructure or the policy conclusions of Neoclassicals or Austrians because if the axioms are false all the rest is worthless.
Only objective-structural axioms lead to propositions which can be confronted with reality. As you should know, empirical test is the ULTIMATE arbiter in science. Or, as Asad Zaman put it: “… no matter how clever you are, and no matter how fancy your theory is, if it does not match observations, it is wrong.”
In brief, that you find the structural axiom set too simplistic is in turn too simplistic: it is the PROOF of logical and material consistency that counts in science and NOTHING else.**
As far as one can see, there is NO serious alternative to the objective-structural axiom set.
Egmont Kakarot-Handtke
* “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (J. S. Mill)
** For the proof that Austrian profit theory, too, is false see ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395
My contention is that your axioms are not at all objective or minimal-realist. They are simply false because of essential factors that you leave out, and that leads you to absurd conclusions like the comprehensively refuted idea of neutrality of money.
To be fair, I think your approach could approximate reality reasonably well if you only included unbacked credit (characterised by imperfect transfer of purchasing power) to both businesses and households in your pricing model.
Michael Kowalik
(i) The issue of this thread is that Asad Zaman not only asserts that Orthodoxy is axiomatically false ― to which all heterodox economists agree ― but that it is INTENTIONALLY false. This raises, first of all, the following question: Heterodoxy, too, is axiomatically false,* and now it would be interesting to learn, whether this is also intentionally?
(ii) If it is intentionally this opens a big can of worms, e.g. can students sue their university for false teaching? or the textbook publishing houses? or the textbook writers? Is there something like an educational product liability? bear economists liability for misleading policy advice that causes enormous damages (e.g. unemployment)? have they to pay back Nobel Prize money? have they to be thrown out of academia? and so on. Intentionality is a serious accusation, and I wonder whether this is consensus among heterodox economists.
(iii) Therefore, in the given context, the structural axiom set is not at all an issue. If you think your axioms are better simply stick to them. I have no intention to convince you of anything. For me it suffices to REFUTE you.
(iv) If you think you have found a mistake/error in my papers, please add the reference. I cannot answer to assertions like “you do not adequately account for new bank-credit” except that this is the worst nonsense imaginable. I have written two papers about the Quantity Theory and there you can study the relationship between money and credit and credit creation in extenso. In fact, ALL my papers deal EXCLUSIVELY with pure credit money. Your assertion is patently false and everybody can easily check it.** Money and credit follow DIRECTLY from the structural axiom set! And this is as it MUST be! ALL economic phenomena must ultimately follow from the axioms.
This, exactly, is the beauty of axiomatization. “A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended is its area of applicability.” (Einstein)
Austrians in general and you in particular never got this point.
Egmont Kakarot-Handtke
* See ‘The scientific self-elimination of Heterodoxy’
http://axecorg.blogspot.de/2016/06/the-scientific-self-elimination-of.html
or ‘Heterodoxy, too, is scientific junk’
http://axecorg.blogspot.de/2015/09/heterodoxy-too-is-scientific-junk_85.html
** See working papers on SSRN http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665
I agree with Asad that the economic elite is committing what amounts to (scientific?) fraud. You claim you have found the objective structure of economics and insisted we read your work before ‘making fools out of ourselves’. I did read several of your key papers and it appears that you serve the interest of the economic/banking elite under the guise of heterodoxy.
For example: “The quantity of money has no causal effect on the market clearing price. The commonplace Quantity Theory has to be rejected. Many people do not understand how the banking system can create money and credit out of nothing and suspect that the public is exploited in the process either through excessive interests or creeping inflation. It should be clear from the functional analysis that money and credit creation can happen at zero profit and perfect price stability. In principle it does not matter which legal form the central bank has and whether it has been created by the state or by private investors.”
Wow! The banks could not wish for a better ‘heterodox’ adversary.
Or are you conflating what ‘could be’ and what actually ‘is’.
If money were neutral then monetary counterfeiting would have no influence on prices. Also, availability of cheap (or free) credit would cause no price inflation if, as you claim, Prices were determined only by Wages and Productivity.
Michael Kowalik
The section from where you have taken the quote is titled “From function to institution” (2015, Sec. 11). Accordingly, the section STARTS with a FUNCTIONAL analysis which describes how the ideal banking system operates and then continues IMMEDIATELY after your quote:
“This said, it is clear that in the concrete case the institutional design of the central bank is of utmost importance. Not many countries have been perfect in the art of institution building. The Federal Reserve System in particular has met with a lot of critique lately. Only part of it is justified. The functional analysis provides some ideas for institution building. It should be clear that successful institution building presupposes the correct theory of money. What we have analyzed above is the ideal type of the monetary economy and the central bank. This helps to identify the institutional weak spots of concrete banking systems.”
In brief: you need to know what it takes that an aircraft flies (laws of aerodynamics, thermodynamics, material science, etc) in order to build one and in order to explain in the concrete case why it crashed (bad design, functional failure, human failure, etc). The functional analysis delivers the OBJECTIVE benchmark of a well-functioning economy (2013). Against this background the mathematical proof can be given that the actual monetary economy MUST break down EVEN if it functions perfectly (2014). This proof refutes the central assertions of General Equilibrium Theory.
Independently of this, the fact of the matter is:
(i) You do not know what profit is, so you have no idea how the monetary economy works. This you have in common with Orthodoxy. Both, heterodox and orthodox profit theory is PROVABLY false.
(ii) As a collateral damage, your theory of money is provably false. This you have in common with Orthodoxy.
(iii) Either you do not understand what you read or you do not know how to quote correctly.
The version of Heterodoxy you represent is scientifically NOT better than Orthodoxy but worse. And Orthodoxy is already bad enough.
The common denominator of current Orthodoxy and Heterodoxy is that it is political economics and NOT scientific economics. And political economics has produced NOTHING of scientific value since Adam Smith and Karl Marx. The failure of economics is due to the scientific incompetence of BOTH orthodox and heterodox economists.
The question of whether economists are naturally incompetent or intentionally is a moot one. ALL incompetent scientists have to be thrown out of science/academia, no matter what their political color is. Science is ABOVE politics.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2013). The Ideal Economy: A Prototype. SSRN Working Paper Series, 2355860: 1–27. URL http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=2355860
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2375578.
Kakarot-Handtke, E. (2015). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL http://papers.ssrn.
com/sol3/papers.cfm?abstract_id=2569663.
Egmont tries to convince us that the ‘ideal’ he made up is objectively true, while the ‘actual’ is objectively false. Some science!
having looked at that paper ‘capitalism breakown’ by EK-h (which either I hadn’t seen or is better (more coherent) than I remembered , i’d have to give my ‘heterodox view’ tho not in detail.
I think unlike kowalik there is absolutely no reason that quantity of money is required to have an affect on the economy. But as Kowalik says later ‘unless you confuse what actually is with what could be’.
This is the same reason why I disagree with EK that general equilibrium theory is faLse. GEt may not ‘actually exist’ but theoretically could, as a coin could theoretically stay on its side indefinitely.
Also, as far as i’m concerned his model (last graph of ‘breakdown’ ) in that paper can be interpreted as a particular example of a general equilibrium economy—its not a collapse (at least based on the equations he uses as I understand them—I think I finally got that z with 3 dots—never seen that notation elsewhere) .
you can get the exact same graph using different equations and then one likely would interpret it as a collapse.
(What i find interesting about this is that it suggests that everything is a matter of interpretation —even whether two different sets of equations can actually be interpreted as being the same. This typically is termed things like ‘illusion of randomness’ or even better ones—‘underdetermination’ in ‘inverse problems, nonisomorphism, ‘anything goes’, and different wAys in old theorems.. ‘ .
Michael Kowalik
The actual situation and the alternative futures of Heterodoxy are summarized in this Wikimedia-chart:
(i) Most heterodox economists are at E (traditional Heterodoxy) and have the choice between E-C, E-F, and E-I.
(ii) I am at B (constructive Heterodoxy) and propose to move to C.
(iii) Some heterodox economists are at H (nihilistic Heterodoxy) and they go to nowhere.
As everybody can glean from my posts* I argue against E-F (the pluralism of false/inconclusive theories) and E-I (the weaponizing/capturing/politicizing of economics in the name of either the one-percenters or the ninety-nine-percenters).
I see you on E-I, that is, the Zaman way.
Science is ABOVE politics and the ULTIMATE arbiter of science is the theory-guided observation/test. Methodological discussions are pointless in economics because the scientific criteria are given and immutable (= material and formal consistency). So, there is either sticking to the rules or leaving science (Sexit**), but no such thing as playing with the methodological net down.
Neither the one-percenters nor the ninety-nine-percenters have anything to say in science. Political economics in ANY form or color is inadmissible without exception. The separation of politics and science has often been ignored/violated in the past, mostly by the one-percenters. Heterodoxy has to make sure that this does NOT happen in the future.
Egmont Kakarot-Handtke
* See http://axecorg.blogspot.de/
** See ‘Enough! Economists, retire now!’
http://axecorg.blogspot.de/2016/07/enough-economists-retire-now.html
As “blocke, the” put succintly, there is a huge difference between social science and physical science which EKH completely fails to understand. Physical laws are invariant over time and over human cultures, holding equally well among the Incas, the Hottentots, and the Chinese, and also holding equally well in the 17th century and the 21st. However, economic systems which deal with production, distribution and consumption of goods and services are INTIMATELY tied to the socio-cultural norms, which vary by time and by geography. There are no non-trivial economic axioms which would be equally true in British Colonial India in the 19th century, Nigeria in the 21st, Brazil in late 20th, and France during the World Wars. By “non-trivial” I mean axioms which provide some insight in the functioning of the economy at the time and place specified. The American Indians had a society which explicitly held that natural resources were common property and could not be held as private property by anyone. This social norm was overturned and replaced during the Enclosures movement in England, which led to the emergence of the modern private property concept, radically different from older and more widespread views of property as a TRUST, to be held temporarily with due respect for social responsibility. Social norms make a huge difference to economic outcomes — in Europe there is much greater consensus on the need to protect the poor, and hence Europe has much better social welfare programs — in comparison with USA where the ruthless free market outcomes are much more socially acceptable, and hence the society tolerates a lot more poverty and has a lot less in the way of social welfare. Without taking into account local culture, resource availability and other historical, geographical, political and social factors, it is impossible to say anything significant about the processes by which the society makes decisions regarding production, distribution and consumption of goods and services. There are no time and place invariant economic laws. This is RADICALLY different from physical science, where none of these factor play any role.
Asad Zaman
You say: “As ‘blocke, the’ put succinctly, there is a huge difference between social science and physical science which EKH completely fails to understand.”
Yes, there is a huge difference between social science and physical science. The difference is that the social sciences are cargo cult sciences (Feynman) and therefore have to be expelled from the sciences. The term social “science” is a misnomer insofar as the greater part of the social sciences does not satisfy the criteria of formal and material consistency.
The curious thing is, as far as economics is concerned, that beginning with Smith and including Marx economists insist on doing science. This is either a self-delusion or an abuse of the reputation of science as highly successful producer of objective truth.
The economist and methodologist J. S. Mill was well aware of the ‘huge differences’ and he papered them over by euphemizing economics as ‘inexact and separate science’. And this goes on to this day whenever economists are confronted with the proof that what they do is storytelling but not science. There is NO such thing as an inexact and separate science. There is only science and non-science.
For everyone who can read, my argument is that the definition of economics as social science is the foundational error/mistake. See above: “The crucial point is that economics deals not primarily with individual human behavior or society at large. This is the realm of psychology, sociology, anthropology, history, political science, social philosophy, biology/Darwinism/evolution theory etcetera.”
So, do not pester me further with bottomless trivialities like: “However, economic systems which deal with production, distribution and consumption of goods and services are INTIMATELY tied to the socio-cultural norms, which vary by time and by geography.”
Yes, Si, Ja, Oui … BUT these socio-cultural norms are the subject matter of sociology, anthropology, history etcetera and NOT of economics. The first task of economics is to figure out what profit is and the fact of the matter is that NO socio-cultural economist has figured out this until this day. This includes blocke and Asad Zaman and Michael Kowalik and Ken Zimmerman. It is a bit surrealistic when economists who cannot tell what profit is philosophize about economic methodology.
You say: “There are no non-trivial economic axioms which would be equally true in British Colonial India in the 19th century, Nigeria in the 21st, Brazil in late 20th, and France during the World Wars. By ‘non-trivial’ I mean axioms which provide some insight in the functioning of the economy at the time and place specified.”
I do not make such a brain-dead claim.* What I say is this:
(i) The subject matter of economics is the monetary economy. The exchange of cowrie shells for bananas and ALL other precursors of the monetary economy are left to anthropologists/historians.
(ii) The theory of how the monetary economy works is based on a set of three almost self-evident axioms to which every student with average intelligence can tentatively agree.** These axioms are objective-structural and entirely FREE of behavioral assumptions or socio-cultural specifics.
(iii) From this minimalist formal core follow in consistent logical steps theorems, e.g. the Profit Law or the structural Phillips curve. These (behavior-free/structural/objective) theorems hold for monetary economies of ALL times and places and all variants of property rights. All theorems are readily TESTABLE.
(iv) In these three steps and subsequent differentiation a formally and materially consistent economics is built up. Insights about human nature/behavior/action is taken in from the so-called social sciences IF NEEDED.
Given the failure of Orthodoxy, what Heterodoxy has to do is to come forward with testable propositions about how the economic system works. What neither Heterodoxy nor Orthodoxy can do is to continue storytelling and philosophizing about methodology and to claim that this is science.
The claim that Orthodoxy is pro-capitalist and anti-worker and that Heterodoxy is pro-worker and anti-capitalist is a political argument. But politics and science are different and incommensurable things. Even if the claim is perfectly true it is IRRELEVANT because it tells us nothing about whether orthodox economic theory or heterodox economic theory is true. In fact, BOTH are logically and materially INCONSISTENT. The proofs are on the table.
Egmont Kakarot-Handtke
* Check my blog or my working papers first before making a fool of yourself
http://axecorg.blogspot.de/
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1210665
** See ‘How to get rid of the silly Queen’
http://axecorg.blogspot.de/2016/06/how-to-get-rid-of-silly-queen.html
Reply 7 july 16 to Egmont on Economic Theory of the 1%.
I enjoyed this robust rejoinder, Egmont, even though I don’t think your are quite getting to the root of the problem. Your equations (or the Leavitt’s Diamond structure of Wheatstone’s bridge) may or may not apply to the generation of monetary profit. That is the problem with mathematics, including formal structures of systematic inter-relation: the formal structure is open to various interpretations in much the same way as the way of representing numbers in the arabic system is applicable at many levels of significance and to many physical units, including carriers of bits of information.
“[T]he definition of economics as social science is the foundational error/mistake. … The first task of economics is to figure out what profit is …”.
Well, yes and no: economic systems are a feature of human society, but no, how ‘profit’ is conceived depends on the type of economic system, so ‘economics’ and economic science cannot be constrained to monetary economics (which indeed needs the adjective to differentiate it, as does your view of economics as a system science). I would say that “the first task of economics is to figure out what its purpose is, variously described as [human] household management, human ecology, achieving “the greatest happiness of the greatest number [of people] ” [Mill], which implies – as I put it – different aims for humans of different sexes in different phases of life, and the problem of how to make that possible. The solution to a mathematically similar problem in multi-purpose information processing, with objects and processes interacting with data and output devices, has been to prioritise and timeshare by giving way to the most urgent in the event of conflict of timings.
So yes, I agree: treating it as a subset of a social science as it now is, with the methodology formed by Hume when the only branch of empirical science was the physical one, is the foundational error in economics, which in fact it involves one-to-many communication as well as one-to-one psychic or physical interaction. That requires the formal methodology of the information system branch of science, which includes interpretation of the physical and the possibility of random errors and lies, whereas physical science abstracts from these, usually using language as transparently as economics uses money.
Information science has its own formal methods of systems analysis and synthesis. Try modelling an economy with SSADM (the Structured Systems Analysis and Design Method) and its objects with Algol-68R, the prototype algorithmic “wheels within wheels” structured, logically typed language. Evaluation of the initial drafts iteratively weeds out ambiguities and omissions, and inclusion of an audit trail provides protection against random errors, lies etc in the data. Models can be as simple or detailed as one needs, automatically including other fields of science by means of transactions dealing with them, as easily as Algol68 programs can make use of pre-defined library procedures. A q procedure defines what it does, and is said to be true when (to quote the advertising jingle) “it does what it says on the tin”.
As for lack of a definition of monetary profit, given J S Mill’s utilitarian “happiness” framework (derived from Hume’s arguments restricting what we can know to feelings), Charles Dickens – an observant writer rather than a book economist – defined it famously by having his character Mr Micawber say:
“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Your “storytelling”, of course, includes not only true fiction but “porkies”, which in the case of economics usually tell the truth, but not “the whole truth and nothing but the truth”. Especially not when the philosopher or economist is “seeking his fortune” from the 1%, or trying to “save face” by hiding his faults and ignorance from his pupils.
So, Egmont, let me ask why you have not even mentioned my often-repeated argument that an economy is an information system? That my material axiom is the energy of the Big Bang (hence Hubble’s expanding bubble) and my formal (representational) axioms are the operations of closure and symmetry (hence circuits to localise strands of energetic motion, Cartesian coordinates to distinguish four different regions of its spherical surface, and algorithmic evolution in the manner of the representation of arabic numbers). From these I can deduce macro representations of the macro structure of all the rest, including economies.
Fundamental physics has thus led me back to formal representational structures iconic with the channeling of unspecified energetic behaviour going on within or bounded by them, which at the level of human behaviour is purposeful, with its value in specific cases lying in how well the structural channelling both represents and fulfils the purposes for which the energy has been, is or will be used, i.e. carrying power en mass or distinguishable informative variations. Evaluating and discovering how to improve the fitness of these for human purpose I take to be the functional domain of the applied sciences.
Since you seem to like Popper, let us consider that as a Conjecture. How (other than by simply denying it) would you Refute it? Or will you finally admit it as a different way of looking at rather than modelling economies and their problems: a paradigm new to them?
“The first task of economics is to figure out what profit is and the fact of the matter is that NO socio-cultural economist has figured out this until this day. This includes blocke and Asad Zaman and Michael Kowalik and Ken Zimmerman. It is a bit surrealistic when economists who cannot tell what profit is philosophize about economic methodology.”
Where have you been for the past 90 or so years. German business economists discussed the question of Wirtschaftlichkeit and profits in the early 1920s, and the discussion about profit hinged on definition about the purpose of the firm. Wilhelm Rieger wrote that the firm was a Geldfabrik and hence Return-on-investment was the measure. That standard Anglo-saxon view is based on the proprietary idea of the firm. Heinrich Nicklisch said that the firms existed to serve the community, and hence profitability has to be measured in these terms, not in ROI. Social-cultural economists have not figured out what profit is today because the subject profit depends on views about the purpose of the firm, and they are different.
Profit is a word that should be omitted from economics. The 3 returns on productive activities (employing land, labor and durable capital) are ground-rent, wages and interest or dividends, respectively. Nothing is left over after all the expenses of the producer have been paid. The concept of some additional money coming out of this process is confusing and gives the would-be theory maker an indefinite term with which to add confusion. It can easily and should be abandoned.
robert locke
You say: “German business economists discussed the question of Wirtschaftlichkeit and profits in the early 1920s, and the discussion about profit hinged on definition about the purpose of the firm.”
True, but business economists, being business economists, have the horizon of a kneeling ant. And what they do is to deliver an INTERPRETATION of a minuscule cutout of economic reality.
What is needed INSTEAD is the monetary profit for the (world-) economy as a whole. This is a measurable variable whereas what the socio-cultural economist regularly delivers is woolly PsySoc babble. Best of all, these interpretations are contradictory and when generalized for the economy as a whole the fallacy of composition kicks in and this renders the whole exercise worthless. Profit for the economy as a whole does NOT AT ALL depend on PsySoc factors or what people think about it or what the purpose of the firm is. Monetary profit is given by the objective and immutable PROFIT LAW with the accuracy of two decimals.
You ask me: “Where have you been for the past 90 or so years?”
Most of the time in the real world where I have collected profit definitions from Adam Smith onward* and, guess what, it did not even take me one year to realize that they are ALL contradictory and ALL false.**
Isn’t it curious that economists never felt the urge to clear up the mess and to meticulously define the pivotal concept of their subject matter? Obviously, in the past 90 or so years they did not wake up from their PsySoc delirium.
Egmont Kakarot-Handtke
* See ‘Profit: One way to get it right, many ways to get it wrong’
http://www.axec.org/#!profit-w/cmlw
** See ‘Profit and the collective failure of economists’
http://axecorg.blogspot.de/2015/11/profit-and-collective-failure-of.html
and also ‘How the Intelligent Non-Economist Can Refute Every Economist Hands Down’
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705395
EKH, in Germany, as you must know, students of Wirtschaftswissenschaften follow the same studies until they either major in BWL or VWL. In the 1920s Volkswirte were primarily academics, that is they did not work in business or industry, those jobs were increasingly held by Betriebswirte. They played (Schmalenbach etc.) an important role in the work of the Reichskuratorium fuer Wirtschaftskeit. In other words I have a great deal more confidence in Betrebswirte than I have in Volkswirte when it comes to the real economy.
robert locke
As an economist I am interested in how the monetary economy works.
I am NOT interested in how the German or the US educational system works. As far as economics is concerned neither system has produced noteworthy scientific output but only a lot of more or less useful sociological micro-studies that are confined to a tiny section of geographical space and historical time. This admitted, one has to realize that after more than 200 years economists do still not know how ‘the monetary economy’, i.e. an abstract entity with unspecified space-time coordinates, works. Walrasianism, Keynesianism, Marxianism, Austrianism are provably false.
I am NOT interested in the economist as person/character but in his/her research output. When I read a paper I want to learn something about the economy and not be bothered with personal idiosyncrasies. I am focused on whether the paper is logically/empirically correct and not on whether the author is a good or bad guy and what his nationality, gender, reputation, religious/political/sexual orientation is and who his collegues and friends are. I do NOT study CVs, I study economics.
Of course, I agree with Asad Zaman that a meta-analysis of how the community of economists organises itself and interacts and communicates with society/business/state and how it allocates financial/non-financial incentives/disincentives is very important. There has been done excellent work by Mirowski in this field (1995; 2002; 2009), BUT meta-economics deals with economists and NOT with the economy. Meta-economics or the study of the history of economic thought are worthy subjects in themselves but vastly different from economics proper.
In brief, I have no qualms with what Asad Zaman says about the one-percenters or the importance of meta-economics, except that it leads AWAY from the point at issue, that is, the materially and formally correct theory of how the monetary economy works.
The actual situation and the alternative futures of economics are summarized in this Wikimedia-chart:
(i) Neoclassical economics is dead but not buried (squares D and G).
(ii) Most heterodox economists are on square E (traditional Heterodoxy) and have the choice between E-C, E-F, and E-I.
(ii) I am on square B (constructive Heterodoxy).
(iii) Some heterodox economists are on square H (nihilistic Heterodoxy) and they are going to nowhere.
The two wrong ways for the heterodox student of economics are E-F (toward the pluralism of false/inconclusive theories and incoherent stand-alone micro-truths) and E-I (toward the weaponizing/capturing/politicizing of economics).
I think, E-F roughly characterizes your way and E-I roughly characterizes Asad Zaman’s way.
For the young students of economics two things are certain (i) Orthodoxy and traditional Heterodoxy have failed, and (ii), because they will not be spoon fed with the true economic theory by their teachers they will have to figure it out for themselves. Mind you, whoever accepts utility maximization, supply-demand-equilibrium, microfoundations, I=S, well-behaved production functions, rational expectations and all the provably false rest of Econ 101 is out of science from now to eternity, no matter what is written on his diploma.
Egmont Kakarot-Handtke
References
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Mirowski, P., and Plehwe, D. (2009). The Road From Mont Pelerin. The Making of the Neoliberal Thought Collective. Cambridge, MA, London: Harvard University Press.
Mirowski, P., and Sent, E.-M. (2002). Science Bought and Sold, chapter Introduction, pages 1–66. Chicago, IL, London: University of Chicago Press.
As Feynman put clearly, no matter how clever you are, and no matter how fancy your theory is, if it does not match observations, it is wrong. Steve Keen has argued at length that conventional macro theories are not capable of producing financial crises — therefore, they can be rejected because the models produce results which cannot match observed empirical realities. Even playing along with your confinement of economics to monetary theory, there is no way to understand money without understanding human behavior. For example consider the BREXIT vote and the subsequent drastic drop in the value of the GBP. It is impossible to explain this phenomena without understanding human behavior. Today’s monetary system is highly asymmetric, where dollar plays a key role as a reserve currency, and printing trillions of dollars does not lead to inflation — the same tactic would lead to hyperinflation in other economies. Again there is no way to understand/explain this phenomenon without paying attention to historical and structural details which would fall outside the ambit of any axiomatic system. Even within formal models, it is easy to show the central importance of human expectations, and hence human behavior, in determining the value of money — for a demonstration, see my paper on The Monetary Paradoxes of BabySitting Cooperatives. http://ssrn.com/abstract=2785952 To conclude, it is IMPOSSIBLE to study economics without having a theory of human behavior. One cannot explain ANY observation about any currently existing real world economy without making some assumptions (explicit or implicit) about human behavior. PROFIT is also a subjective concept — as the bible says: For what shall it profit a man, if he shall gain the whole world, and lose his own soul? The attitudes toward profits have changed in the course of the Great Transformation, and without taking these into account, one cannot study dynamics of an economy.
The problem with Egmont’s word ‘profit’ is that its epistemology is ambiguous. It can earned, or it can be won by gaming.
The economist as second-guesser, mind reader, and folk psychologist
Comment on Asad Zaman on ‘ET1% — Economic Theory of the top 1%’
You say: “As Feynman put clearly, no matter how clever you are, and no matter how fancy your theory is, if it does not match observations, it is wrong.”
We perfectly agree.* Science is strictly about material (empirical) and formal (logical) consistency (Klant, 1994, p. 31), everything else is storytelling.
You say also: “Even playing along with your confinement of economics to monetary theory, there is no way to understand money without understanding human behavior.”
Please note, when I use the term monetary economy then this is the SAME thing what Keynes called the monetary theory of production. The monetary economy is the real economy. The “real” economy in the sense of Sraffa, RBC or other money-is-a-veil approaches is NOT the real economy. The monetary economy constitutes itself through the interaction of real AND nominal variables. The monetary economy has nothing at all to do with what is known as Monetarism (2011).
You say: “For example consider the Brexit vote and the subsequent drastic drop in the value of the GBP. It is impossible to explain this phenomena without understanding human behavior.”
Seen from the business sector, the Brexit vote is an external shock. Imagine the business sector conducts a post-Brexit survey asking consumers ‘How much will your consumption expenditures decrease/increase YoY’ and asking firms ‘How much will your investment expenditures decrease/increase YoY’ and so on. Let us assume the survey yields reliable numbers. This is ALL the business sector or the economist needs to know. It is absolutely irrelevant to understand why people voted as they did (frustration, economic distress, fear, hope, xenophobia, stupidity, propaganda, etc). This is an issue for sociologists or other social scientists.
The social scientists will deliver an INTERPRETATION and here the problem is: “… observed acts of behavior allow an indefinite number of interpretations regarding the plans from which they are assumed to have sprung.” (Morgenstern, 1941, p. 381)
For the understanding of how the monetary economy works these interpretations are IRRELEVANT. What is needed are the concrete rates of change of expenditures and other economic variables. And these do certainly NOT come from highly subjective interpretations. For a businessman who goes bankrupt after Brexit it is a matter of indifference whether this is due to racism, pessimism, stupidity of his countrymen/government, or the wrath of God for former sins. The why-interpretation in NO way affects the real situation.
Of course, for the political discussion and agenda pushing and sitcom gossiping all this PsySoc stuff is important. But politics and economics should be kept strictly separated and politics should be left to the political scientists. The economist’s business is the economy and NOTHING else. For the economist the Brexit is simply a one-time random event and nothing is gained by mind reading the population after the fact. Explanations are for the birds.
You assert “… the same tactic would lead to hyperinflation in other economies. Again there is no way to understand/explain this phenomenon without paying attention to historical and structural details which would fall outside the ambit of any axiomatic system.”
You simply do not get what axiomatization is all about. A concrete event is a combination of space-time specific conditions and the interaction of universal laws (2014). When a man is thrown out of the window this is a political or criminal act but independently of this the Law of Falling Bodies applies. The Law is part of the general theory of motion which in turn has been axiomatized by Newton. Clearly, the theory of motion does NOT explain why the man flew out of the window. But there are neighbors and bystanders and psychologists and journalists and paranoiacs who can readily “explain” it. These explanations are guesswork and mind reading and storytelling and scientifically worthless. All this stuff can be left to the police and the historian.
Nobody needs an economist to predict that the exchange rate will plummet when a country falls apart. This is common sense stuff and every forex trader or journalist will predict it. And that actions are guided by expectations is a triviality since the dawn of mankind. But second-guessing expectations is not science but folk psychology and vacuous speculation. Here Keynes’s dictum applies: ‘We simply do not know.’ However, people/economists like to waffle about expectations because everybody can contribute with his own silly guess to entertaining human communication.
You say: “To conclude, it is IMPOSSIBLE to study economics without having a theory of human behavior.” False. Theories of human behavior are the subject matter of psychology/sociology and economists who are confused about their subject matter. Most microeconomic studies, including your babysitter study, can and should better be left to sociologist.
I say: “To conclude, it is IMPOSSIBLE to study economics without having a theory of profit.”
You have NO theory of profit and therefore you cannot explain how the economy works. Your theory of babysitting does NOT not help that much.
The Iron Law of economic methodology says: NO way leads from the understanding of human behavior to the understanding of how the monetary economy works (2014). And this explains why the microfoundation approach has been doomed to failure from the very beginning.
You say: “Profit is also a subjective concept — as the bible says: For what shall it profit a man, if he shall gain the whole world, and lose his own soul?”
Well said! There is subjective reality and objective reality. Science, though, deals exclusively with the latter. The economist is supposed to figure out the Profit Law and he is neither supposed nor entitled nor qualified to preach about lost souls.
It is high time that Heterodox economists make up their minds whether they want to become a religious sect, political agenda pushers, or the future scientific mainstream.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011). Reconstructing the Quantity Theory (I). SSRN Working Paper Series, 1895268: 1–28. URL http://ssrn.com/abstract=1895268.
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=2418851.
Kakarot-Handtke, E. (2014b). The Synthesis of Economic Law, Evolution, and History. SSRN Working Paper Series, 2500696: 1–22. URL
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2500696
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political
Economy, 49(3): 361–393. URL http://www.jstor.org/stable/1824735
* For the Feynman quote and the YouTube link see ‘There is no like/dislike button
in science’
http://axecorg.blogspot.de/2015/11/there-is-no-likedislike-button-in.html