Ignoring elementary economics

13 July, 2015 at 19:12 | Posted in Economics | 6 Comments

KeynesByGrant The negotiations on the Treaty of Versailles have so far been disrupted by the attitude of a British negotiator, a certain John Maynard Keynes. He has a flamboyant personality and dubious morals, and has consistently employed an arrogant and professional tone to crush other negotiators with his contempt.

Ignoring the elementary lessons of economics, Mr Keynes has argued that countries running current account surpluses, and which have made significant efforts, are just as responsible as countries running deficits in creating economic imbalances. Moreover, he has asserted that in times of underemployment, the surplus countries should spend more, thereby encouraging prodigality. He has claimed that in periods of economic hardship, public spending should be increased, and has mocked officials who naturally believe that a country cannot increase its output by spending less in order to save more. He has supported the view that Germany should be allowed to reconstruct its economy by cancelling its debts, whereas crushing Germany under the weight of repayments would push the country into misery, and so encourage its far right. In fact, it is of course clear that even a partial cancellation of debts would set a dangerous precedent, and favour waste. Lastly, he has called on all countries to scrap policies decided unanimously, which support the return to gold parity at pre-war levels. Moreover, he has claimed that this objective is not only costly and unfeasible, but has also been responsible for Europe’s weak growth, while Mr Keynes has refused to accept that wages are excessive.

Having alienated all the reasonable representatives and delegations, Mr Keynes has chosen to resign. This is good news for peace in Europe.

The Appalled Economists

Sounds familiar, doesn’t it?

6 Comments »

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  1. Unreal. It’s like the past never happened.

    • “This is good news for peace in Europe.”

      Supreme irony.

  2. The case for pure economics
    Comment on ‘Ignoring elementary economics’
    .
    What is the proper job of the economist qua scientist? “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (Mill, 2006, p. 950)
    .
    The economist qua scientist brings knowledge to the table, not his personal opinion. It is the legitimate political institution that determines the political ends. This is the ought-part, science is concerned exclusively with the is-part of reality. The is/ought difference is reasonably clear since Hume but has been deliberately ignored by every talented public speaker since then. However, for science this difference is fundamental.
    .
    “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)
    .
    The economist who comments on political goals leaves the realm of science. This, of course, is no problem at all under one condition. All he has to do is to put off his scientific hat and to put on his political hat and then go the other way. This, off course, holds in normal times with legitimate political bodies in place. What has to be done if political bodies are on the way to lose their legitimacy is quite another matter.
    .
    Why has politics and science to be strictly separated? Simply because it is less probable that the scientific ethics of objectivity/impartiality/knowledge flows to politics and more probable that subjectivity/partiality/opinion flow to science. Gresham’s Law about bad money driving out good applied to sociology says: politics debases science but science does not improve politics. Therefore there is an overall net loss from close interaction. Partiality and impartiality simply cannot coexist in one and the same person.
    .
    That part of economics that has been political from Smith, to Marx, to Hayek, to Keynes, and on to the actual orthodox and heterodox activists has to be clearly separated from science and eventually thrown out. To the extent that theoretical economics has been hijacked by political economics it has to regain its full independence.
    .
    As far as politics is of importance for theoretical economics it has to be taken in from political science. Theoretical economics has to answer only one single question: how does the monetary economy work? This presupposes that the economy is understood — broadly speaking — as a system with objective features. Of no primary interest is psychological or sociological second-guessing of human behavior. As far as behavioral issues are of importance for economics they have to be taken in from psychology or sociology.
    .
    It is not the task of the economist to dabble in psychology, sociology, political sciences, geopolitics, history, anthropology, law, etcetera. Interdisciplinarity, for one, means that economics relies on the results of other sciences and in turn offers reliable knowledge about the working of the monetary economy. The same applies to all other practical cooperation.
    .
    “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991, p. 30)
    .
    Here is the crux. There is no such thing as a true economic theory. What economists have produced so far is not much more than educated common sense and an abundance of incoherent models that apply nonentities like equilibrium or utility or rational expectations or supply/demand functions or I=S, etcetera, etcetera. Whoever exchanges scientific ideas with an economist gets lemons.
    .
    The deep root of the failure of both Orthodoxy and traditional Heterodoxy is a complete lack of understanding of what profit is.* The profit theory is false since Adam Smith. This in turn means that economists have failed to capture the essence of the market system. Neither Marxian attack nor Liberal defense of the market economy ever had a sound theoretical foundation (2015). Economists have nothing to offer of scientific value.
    .
    In sum: the poor results of political economics are not only an embarrassment for economics but — as a severe collateral damage — have negative external effects for the true sciences. It cannot be expected from the public that it immediately recognizes the difference between cargo cult science** and the real thing. This provides an ecological niche for illusion and deceit that undermines the integrity of science.
    .
    Here is the wake-up call from a genuine scientist. “So we really ought to look into theories that don’t work, and science that isn’t science.” (Feynman, 1974, p. 11)
    .
    Both, Orthodoxy and traditional Heterodoxy is lost for science. Their proponents are still employable for some econ-talk and entertainment in the media. Yet, young students indeed have the choice between becoming real innovative scientists or just some redundant quacking frogs in the morass of political economics.
    .
    To recall: (i) human progress has neither been brought about by politicians nor by business men nor by economists but solely by scientists, and (ii), because of their scientific failure over the last 200 years economists have consistently stood in the way of establishing overall economic welfare.
    .
    Egmont Kakarot-Handtke
    .
    References
    Feynman, R. P. (1974). Cargo Cult Science. Engineering and Science, 37(7): 10–13.
    URL http://calteches.library.caltech.edu/51/2/CargoCult.pdf.
    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.
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working
    Paper Series, 2624350: 1–40. URL http://papers.ssrn.com/sol3/papers.cfm?
    abstract_id=2624350.
    Mill, J. S. (2006). A System of Logic Ratiocinative and Inductive. Being a Connected
    View of the Principles of Evidence and the Methods of Scientific Investigation,
    volume 8 of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund.
    Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
    Method in Economics and Econometrics. Cambridge, MA: MIT Press.
    * See the blog post ‘Mental messies and loose losers’
    http://axecorg.blogspot.de/2015/07/mental-messies-and-loose-losers.html
    .
    ** See Wikipedia
    https://en.wikipedia.org/wiki/Cargo_cult_science

  3. Darning socks is closer to science than is economics.

    “Of no primary interest is psychological or sociological second-guessing of human behavior. As far as behavioral issues are of importance for economics they have to be taken in from psychology or sociology.”

    Economics is about the decisions made by human beings, hence it has everything to do with understanding human behaviour.

    • You are stuck in something like a pre-Copernican paradigm. You say “Economics is about the decisions made by human beings.”

      (i) Could it be that you do not understand that this is exactly the neoclassical program?

      (ii) Could it be that you have not yet realized that the neoclassical program has been a total scientific failure?

      (iii) From the fact that agents make decisions does not follow that from the understanding of decision making (if we had it, to begin with) follows the understanding of how the economy works.

      (iv) Could it be that you do not understand that Heterodoxy is about the replacement of the naive and hopeless subjective/psychological/behavioral approach by a superior paradigm?

      To repeat already debunked methodological phantasmagoria is not exactly the way forward.

      • Egmont,

        “(i) Could it be that you do not understand that this is exactly the neoclassical program?”

        I am surprised by your point and can’t agree with this at all. It would be difficult to find a page in Keynes’ GT where he doesn’t mention either expectations, animal spirits and uncertainty. Expectations and animal spirits are at the core of human behaviour. Uncertainty confronts every human being making a decision. Every human being is different.

        The perfected homogenized humanity at the base of Neoclassical reasoning I would agree fails economics (as aptly described in Morgenstern’s paper that Lars has posted above).

        On the contrary, any economic theory that avoided human decision making would be akin to the Neoclassical paradigm.

        Extricating human behaviour from economics would be like removing the study of cell behaviour from biology. What kind of science would biology be without consideration of the cell?

        I also believe your quest for scientism is misguided only because it seems, in your hands, to have become an end in itself.

        The mathematician model makers have attempted to bring science to economics, the only result being that their models are poor depictions of reality.


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