Scientific Economics: Review of Progress

It has been three years since this blog was launched with an inaugural post in August 2013.  What has been achieved by way of progress in building a scientific economic paradigm?  Considering the scope and ambition of the project – to start from scratch, to take nothing for granted and to build from a scientific basis – enormous progress has been made.  Here is a summary.

Motivation

One of the motivating factors for the project came from a careful reading of Keynes’ book, The General Theory of Employment, Interest and Money, which many revere as an economic bible.  The book is eloquent, witty, insightful, but unscientific and contains mathematical and logical errors.  Unlike other rhetorical critiques, an early post on this blog shows from empirical data collected over recent decades that Keynesian policy has been harmful to the US economy and could lead to a Keynesian economic collapse.

The aim of the project is to replace the mainstream economic paradigm because it is unscientific and leads to knowledge which is fallacy.  Economic policy based on fallacy has led to the global financial crisis (GFC) and its continuation has been predicted to result in a financial system collapse.  A new scientific economic paradigm is urgently needed.

Definitions and Facts

A paradigm has been defined to include objectives, methods and assumptions.  The objectives of economics have been broadly defined.  What constitutes science and the scientific method has been defined.  The assumptions of the scientific paradigm are based on significant facts which are provisionally recorded as axioms.

For economics, the pursuit of science means taking facts much more seriously than is currently the case.  Existing economic knowledge is mainly theories which are not supported by facts, because economics puts theory before facts.  In science, facts come first and theory is created to fit the facts.  In any case, theories and facts must work closely together, but this has not happened in economics.

When a scientific approach is adopted here in confronting economic theory with data, it was soon discovered that there are hazy and ambiguous theoretical concepts in economics which have endured and have led to confusion.   This explains the muddled thinking which is still prevalent in economics today.

Unscientific Muddle

For example, the meaning of saving is so unclear in macroeconomics that it has led to the “saving=investment fallacy”.  One moment the US government has encouraged substantial saving in financial assets for social security, pension funds and private portfolios.  The next moment, economists declare there has not been enough saving causing insufficient investment.  Still in another moment, it is declared that saving is bad for economic growth because of the paradox of thrift.

Keynes developed his demand driven theory in the shadow of the Great Depression.  What may be appropriate in exceptional circumstances had become habitual in more normal times for the past several decades in the United States.  Perpetual US government stimulation of consumer spending has led to ever increasing propensity to consume and ever declining net domestic investment.   For several decades, the US economy has exceeded optimal aggregate consumption for sustainable economic growth.

Debt and Destruction

Increasing consumption but decreasing production was possible only through ever increasing debt financed consumption in both the private and public sectors.  The large debt represents an enormous transfer of future consumption of savers to the current consumption of borrowers, mainly in housing loans and government deficit spending on social welfare.  The high level of consumption financed through debt has masked, in the GDP statistics, the decline in productivity due to insufficient investment.  Stimulus of consumption through debt is a policy of debt and destruction of the US economy.

The empirical observations, which have repudiated Keynesian economics, have been supported also by pin-pointing the exact mathematical and theoretical errors which have led to a flawed Keynesian multiplier being mistaken for the investment multiplier.  This mistake, called the Keynesian fallacy, has been propagated through basic economic textbooks and has become the foundation of fiscal policy.  Instead of promoting economic growth, over-consumption has retarded economic growth for decades and will lead eventually to a Keynesian economic collapse.

Capitalism and Cognitive Dissonance

Governments which adopt Keynesian economic policies tend to grow ever larger with increasing budget expenditures to prop up weakening economies.  Larger government expenditures have led to shrinking private sectors which are at the heart of capitalism.  Empirical data for 40 largest countries in the IMF database show that capitalism and economic growth are positively correlated.  That is, more capitalism or smaller governments are correlated with higher economic growth.  But instead, governments have grown ever larger almost everywhere in futile attempts to boost economic growth.

Economists suffer from cognitive dissonance which is a disability to recognize inconvenient facts.  They protect themselves from facts with a pluralism of dogmas where everyone agrees to disagree.  This pluralism of cognitive dissonance allows facts to be ignored and prevents the emergence of economics as a science.  Heterodox economists erroneously blame the GFC wholly on neoclassical economics or neoliberalism.  The truth is: economic policies have been based on an ad-hoc and inconsistent pluralism of unscientific theories, which include neoclassical, monetarist and Keynesian economics.

Creeping American Socialism

America has long been held is a beacon of capitalism for the rest of the world.  But a lack of explicit definitions in unscientific economics has meant that a creeping American socialism has gone largely unnoticed by economists.  Capitalism has been blamed erroneously for America’s economic ills, including economic stagnation and wealth inequality.  Outside world wars, the US government has never been larger, now making 11 percent of GDP of transfer payments to redistribute income to boost private consumption.

Income redistribution has been necessary because of falling wages and salaries which have enabled American corporations to make greater profits and be competitive in global markets.  This subsidy is a form of corporate socialism which has benefited executives and shareholders at the expense of workers and taxpayers.  Corporate socialism is not capitalism.  It is responsible for growing income inequality and a hollowing of America, where the exploited middle class is vanishing.  The heart of capitalism, which resides in the small and medium enterprises, has been attacked and the engine of economic growth has been seizing up.

Keynesian Black Holes

Meanwhile GDP has been maintained by increasing consumption financed through fiscal deficits incurring mounting government debt.  Fiscal stimulus of consumption has occurred through transfer payments to social welfare spending.  But the supply of government debt has diverted private sector savings from economic investments in production to financial investments in asset speculation.  The fall in net private investment has led to a decline in economic growth.  Fiscal stimulus has the unintended and opposite effect of retarding economic growth.

Hence, contrary to Keynesian theory, fiscal stimulus has reduced US economic growth.  The weakening economic growth calls forth still more fiscal stimulus which further weaken growth prospects in a vicious downward spiral reminiscent of falling into a Black Hole under the force of gravity.  To the extent that America is the economic role model for the rest of the world, there are now many Keynesian Black Holes ready to suck the whole global economy into oblivion.

If salvation is at all possible, then it is simply to recognize the errors of past ways and to reverse course by shrinking government and give capitalism a chance.  How much capitalism?  From the IMF database, the sizes of governments of major economies range from about 10 percent to 60 percent of GDP.  Countries with strong economic growth and with few recessions have sizes of government less than 25 percent of GDP.  Therefore, more capitalism, less government, means more wealth creation and stronger economic growth.

Helicopter Money

Fiscal stimulus and monetary stimulus over decades have created mountains of debt and have created debt servicing and balance sheet problems.  The great inventive minds of modern economics (GIMME) have revived an old idea of printing money, without issuing debt, to finance government spending to cause inflation.  This idea of Helicopter Money is to force savers, also called rentiers of capital, to spend their money before it becomes worthless due to inflation, in the euthanasia of functionless investors (Keynes, 1936, p. 376).  But helicopter money in operation has been a reality for several years already, helping to cause over-consumption and collapsing economic growth.

So far, this blog has not proposed much by way of economic theory, but has empirically tested the Keynesian theory which has driven decades of economic policy.  For the first time, the impact of government on the economy has been explicitly and scientifically evaluated based on macroeconomic data.  The conclusion is that Keynesian economics is counter-factual, unscientific and significantly responsible for pushing the global economy towards collapse.  The Keynesian fallacy is mainly, but not solely, to blame, as neoclassical fallacy and monetary fallacy also play their parts.  In future posts, money and monetarism will be examined more closely.

Scientific Revolution

So far the main achievement of this blog is presenting significant facts - not only empirical evidence proving the failure of Keynesian economics, but also the reasons for why economic stimulus - loose monetary policy and wasteful government deficit spending - has been counter-productive by increasing over-consumption but decreasing investment and economic production.  The facts presented here are largely contrary to the views of the vast majority of economists, who are continuing to do harm.

On the indifference shown to the empirical evidence presented here and elsewhere, the economic profession is a disgrace.  Economic policy should be based on science, because only scientific economics can lead to the truth.  Much of existing economics is a pretence of knowledge (Hayek, 1974), unscientific and deceptive.  As George Orwell may have said, “In a time of deceit, telling the truth is a revolutionary act”.  This blog will continue with the scientific revolution of economics started here three years ago.

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One Response to Scientific Economics: Review of Progress

  1. admin says:

    Understanding the scientific method still eludes economists and the public, as this recent review of Keynesian economics suggests.

    There have been many critiques of Keynes or Keynesian economics. For example see the collection, The Failure of the "New Economics" by Henry Hazlitt (1977) and a more recent collection, Dissent on Keynes by Mark Skousen (1992).

    Whilst the criticisms may be significant and valid, they have not been fatal. The reason is: the criticisms merely point out theoretical flaws, nonsensical jargon and confusion in the General Theory (Keynes, 1936). Such criticisms do not represent refutation, because the criticisms themselves are equally unscientific philosophizing. They represent merely alternative views of the world.

    Mainstream economists have long accepted (not necessarily correctly) Milton Friedman's apology (1952) that economic models cannot be refuted simply by criticizing the unrealism of their assumptions independently of the accuracy of their predictions.

    In other words, a proper scientific refutation of the Keynesian theory requires taking the theory seriously in the first place, testing its predictions against reality and not just criticizing its assumptions. A theory cannot be refuted from the outside, only from the inside. This is what this blog has achieved.

    This blog has examined separately the impact of the government sector on the US economy, whereas mainstream economics only assumes that their model parameters are influenced by government policy. They do not explicitly examine the actions of government. We have used several decades of macroeconomic data, which are unavailable to earlier generations of critics, to show the detrimental effect of large governments.

    It has been shown empirically here how government policy has actually stimulated aggregate demand, according to the Keynesian prescription, but has caused reduced economic growth, contrary to Keynesian predictions. That is, the Keynesian theory is not only ineffective, but also self-contradictory. This is a scientific refutation which is fatal to Keynesian economics.

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