FIRST PRINCIPLE: “Economics” is an intellectual Trojan Horse with political agendas hidden within known-false assumptions.
The political conclusions follow logically from the assumptions, so if you accept those known-false assumptions,
then you also accept those hidden political agendas.

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From Capitalism To Democracy:
From Complexity to Simplicity

By Jay Hanson -- updated 7/10/2012.

This paper is hereby placed in the public domain and may be reprinted without further permission.
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It’s awful - Why did nobody see it coming?
Queen Elizebeth

Economic efficiency has been the greatest source of social legitimacy in the United States for the past century, and economists have been the priesthood defending this core social value of our era.
Robert H. Nelson, ECONOMICS AS RELIGION

The potential Pareto improvement criterion and other measures of economic efficiency do not pass the test of consistency and coherence within economic theory, nor do such measures accord with what public decision makers seek in policy advice from economists. Such efficiency measures are, nonetheless, durable components of the ideology of economics. Daniel W. Bromley

The problem is, of course, that not only is economics bankrupt but it has always been nothing more than politics in disguise.
Hazel Henderson

Economics is haunted by more fallacies than any other study known to man.
Henry Hazlitt


Economics is deliberately confusing, but after fifteen years of study, I have cut through the jargon and math and can now explain economics in just one sentence: Economics is an expression of political agendas that are hidden within known-false assumptions. If one accepts those false assumptions, then one also accepts those hidden agendas. This brilliant method for subliminal programming has been very effective in instilling libertarian ideals into university students for half a century. However, I am getting ahead of the bigger picture...

Common known-false economic assumptions (click to open)
#1. People are Bayesian equation solvers (the entire argument for market outcomes rests upon this known-false assumption). Here is a partial list of exceptions to the bayesian model: List of cognitive biases
#2. Money is just a medium of exchange (money is inherently political because it can buy others, thus, the political power money of money is intentionally-hidden by economists).
#3. Energy is just a commodity (the production function only assumes capital and labor thereby hiding a limit to growth).
#4. Debt is neutral to an economy (another hidden limit to growth).
#5. The environment is part of the economy instead of the other way around (yet another hidden limit to growth).
#6. Wants are identical to needs (deliberate deception).
Economic Theory For Scientists and Engineers

THE BIGGER PICTURE: CALCULATIONS AND ASSUMPTIONS

Calculations show that conventional oil production “peaked” in 2005 (see graph below), so it is now physically impossible (thermodynamics) to increase “net energy” as we have in the past. Our present business model, which requires eternal economic growth and job creation, is no longer possible.

Peak Oil

 

In order to understand the nature of our crisis, one must evaluate two systems simultaneously: our energy production system and our political system. More specifically, one must evaluate the inexorable decline (literally, impossible to stop) of global “net energy” concurrently with the present use of the “market system” as a means of social control. The information required to gain a basic understanding of these two systems is available on the web page you are currently reading.

Calculations show that the market is not efficient! When economists claim the market is “efficient,” they actually mean “the efficient distribution of benefits”—NOT “the efficient use of materials.” In fact, Americans could be wasting something like two billion tonnes (metric tons) of oil equivalent energy each year! The market system is the most-inefficient social system in the entire history of the planet!

I assume that capitalism has now become illogical. We are destroying the natural world and consuming the remaining resources in exchange for fiat money —which will be worthless when the resources are gone. Moreover, the ongoing planetary destruction is making most Americans unhealthier and unhappier.

I assume that we should make every peaceful effort to prevent our countries from disintegrating into anarchy or engaging in new global wars over resources.

I assume that it is technically possible to make minor changes in the structures of our governments thereby avoiding anarchy and civil war. The key paradigm change here is to realize that goods and services do not need to be mediated by money. In other words, all-powerful government can deliver goods and services directly to citizens (as it’s done to civilians in wartime, and to military personnel during peacetime), which would make our society much more energy and materials efficient. Government can apply science and engineering to social problems without economic concerns. The only reason we live as we do now is because banking interests established the paradigm. As far as I know, my proposal is the ONLY that has the potential to avoid a new series of world wars over resources by intentionally moving from complexity towards simplicity.

I dedicate this web site to the handful of individuals who desire to understand how the inexorable decline of net energy, combined with the use of the market system as a political system, will lead to global nuclear wars over the remaining natural resources—unless minor changes are made to the structure of our government to prevent them. As you shall see, we must move from a capitalistic form of government, which requires endless resource depletion, to a democratic form, which does not.

As you shall see, we must move from a corporate form of government, which requires endless resource depletion, to a human form, which does not.

NET ENERGY IS THE CRITICAL VARIABLE

Energy has always been the basis of cultural complexity and it always will be.
Joseph A. Tainter

Think of a society dependent upon one resource: oil. If the net energy ratio for this oil was 1.1:1 then one could pump the oil out of the ground and look at it—and that’s it. It would be an energy loss to do anything else with it. If it were 1.2:1 you could refine it into diesel fuel, and at 1.3:1 you could distribute it to where you want to use it. If you actually want to run a truck with it, you must have a ratio of at least 3:1 (at the wellhead) to build and maintain the truck, as well as the necessary roads and bridges (including depreciation). If additionally you wanted to put something in the truck and deliver it, that would require a ratio of, say, 5:1 Now say you wanted to include depreciation on the oil field worker, the refinery worker, the truck driver, and the farmer; you would need a ratio of 7:1 or 8:1. If their children were to be educated you would need perhaps 9:1 or 10:1, to have health care 12:1, to have arts in their lives maybe 14:1, and so on.
Charles A. S. Hall


One seldom thinks about the energy that is consumed in systems that supply energy—such as oil-fired power plants. Energy is consumed when exploring for fuel, building the machinery to mine the fuel, mining the fuel, building and operating the power plants, building power lines to transmit the energy, decommissioning the plants, and so on. The difference between the total energy recovered minus all the energy consumed equals the “net energy” (in other words, the net amount of energy actually available to society to do useful work). For more on net energy analysis, see my 1999 paper ENERGETIC LIMITS TO GROWTH.

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As low-energy-cost conventional oil has been replaced by high-energy-cost non-conventional oil (offshore oil, heavy oil, etc.), a greater fraction of the energy produced is consumed by the energy production process itself. Indeed, the net energy fraction of the global energy mix has been falling since before the 60s (see the graph below).

http://seekingalpha.com/article/238746-oil-beyond-the-barrel-and-over-the-cliff

Prior to peak oil, producers could compensate for the falling net energy fraction by simply pumping more conventional oil. However, conventional oil production “peaked” in 2005, so it is now physically impossible (thermodynamic laws) to increase net energy as we have in the past. In other words, producers are geologically constrained and can no longer compensate by pumping more conventional oil. This means that the energy available for economic development —the net energy—will decline for decades as low-energy-cost, conventional oil is replaced by high-energy-cost, un-conventional oil!


The above observation is so important that I am going to repeat it:

Conventional oil production “peaked” in 2005, so it is now physically impossible (thermodynamic laws) to increase net energy as we have in the past. In other words, producers are geologically constrained and can no longer compensate by pumping more conventional oil. This means that the energy available for economic development —the net energy—will decline for decades as low-energy-cost, conventional oil is replaced by high-energy-cost, un-conventional oil!


Even though the total liquid fuel available to society rises, net energy falls faster because a greater-and-greater fraction of energy is consumed by the energy industry itself:

“Some of the fuels (ethanol, natural gas liquids) counted by IEA and EIA in the ‘all liquids category have significantly lower energy content per unit of volume than regular crude oil; thus an increase in barrels-per-day of ‘all liquids does not necessarily mean an increase in the amount of energy delivered to society. Further, all the unconventional liquid fuels (including biofuels, tar sands, and ‘tight oil) offer a low energy return on the energy invested in producing them. Therefore, even if the number of barrels of liquid fuels delivered to market is still gradually increasing, the amount of useful net energy being made available by the petroleum and biofuels industries, when energy costs are accounted for, is probably already declining.”—PEAK DENIAL, Richard Heinberg

It would be as if we had enough energy to produce a hundred automobiles last year. This year, we only have energy to produce fifty automobiles. Next year, we will have enough energy to produce twenty-five automobiles. The relationship between total liquids and net energy is neatly illustrated in the upper half of the graph below:

morebutless

THE GLOBAL ECONOMY IS “NET ENERGY” CONSTRAINED NOW!

1. Business-as-usual depends upon jobs and markets to distribute goods and services.

2. Economic growth and increasing job availability require increasing “net energy:”

“If we want world real GDP to grow by 4.0% per year, the fit from Figure 5 (based on the equation y = 0.741 x + 0.0193) would suggest that world oil supply needs to rise by 2.8% per year. If we want world real GDP to grow by 3.0% per year, we need oil supply to grow by 1.4% per year.”—HOW MUCH OIL GROWTH DO WE NEED TO SUPPORT WORLD GDP GROWTH? , Gail Tverberg

3. Global net energy correlates with the 2005 peak in conventional oil and both are expected to decrease for decades.

4. Decades of decreasing net energy will cause job opportunities to decrease for decades because less and less energy will be available for economic development.

5. Globally, millions of new workers enter the job market each year, but job availability is expected to decline by millions of positions each year. Eventually, the projected high unemployment among young men will cause catastrophic political failures similar to those that led to Hitler’s takeover of German democracy. Therefore, business-as-usual is no longer a viable method of distributing goods and services—and a new method must be found—and soon!

Over time, everything we dig out of the ground requires more-and-more energy! Although we have discussed the inexorable increase in energy required to produce energy itself, we haven’t discussed the fact that the same energy laws apply to everything we dig out of the ground. A detailed discussion is beyond the scope of this piece; however, here is a nice graph which illustrates the process: MoreCurves.html

THE MARKET SYSTEM AS “A MEANS OF CONTROL”

POLITICS:
n 1: social relations involving authority or power

Money to gain power; power to protect money.
de’ Medici Family Motto (apocryphal)


A feeling arose by the seventeenth century that moralizing and preaching religious doctrine could no longer be trusted to restrain the destructive and “irrational passions” of men. A new means of control had to be found:

“Peasant rebellions were not exceptional events. They erupted so frequently in the course of these four centuries that they may be said to have been as common in this agrarian society as factory strikes would be in the industrial world. In southwestern France alone, some 450 rebellions occurred between 1590 and 1715. No region of Western Europe was exempted from this pattern of chronic violence. The fear of sedition was always present in the minds of those who ruled. It was a corrective, a salutary fear—since only the threat of insurrection could act as a check against unlimited exactions.” —AFTER THE BLACK DEATH, George Huppert

“Libertarianism” is a political philosophy that advocates the maximization of liberty for every individual. Bernard Mandeville (1670?-1733) laid the philosophical foundation of libertarianism when he suggested that a society founded on “rational interests” (like a bee hive) would suppress irrational passions. Mandeville’s ideal society was one where the unwitting cooperation of individuals, each working for his or her own interest, would result in the greatest benefit to society at large.

The French writer Baron de Montesquieu (1689-1755), further developed libertarian politics with a division of political powers in government. The division of power would, in effect, neutralize government and prevent citizens from gaining power over each other; conversely, citizens could easily make power powerless by changing parties. This is what Montesquieu called “liberty.” Today, we call Montesquieu’s philosophy “Social Darwinism”—a term which is most closely associated with the writings of Herbert Spencer. Spencer coined the phrase “survival of the fittest” —a term that describes Montesquieu’s state of “liberty” perfectly.

The French physician François Quesnay (1694-1774) was the leader of a sect of Enlightenment thinkers known as the Physiocrats (or économistes) who founded libertarian economics. The term “Physiocracy” means “rule of nature” and was coined in 1767 by Pierre Samuel du Pont de Nemours to describe the doctrine of the first modern school of economics. Quesnay transformed economics into its present role as the science of wealth. In so doing, he disengaged the economic process from its role as a servant of society, and established its claim to be the direct manifestation of the natural order. In other words, he argued that the market itself embodied natural law and should thus dictate the sociopolitical order.

Quesnay arrived at his theories of a free market and economic individualism by studying the emergence of a national market in England. However, he always understood that in eighteenth-century France, the unfettered pursuit of individual interest might not result in the natural order he sought to establish. Quesnay knew that men could fail to behave “economically.”

Quesnay believed that his introduction of arithmetic precision into economics provided a scientific rule that should dictate appropriate political arrangements— and even the obedience of sovereigns. However, he was never willing to trust the spontaneous development of the proper sociopolitical order. Nature required the assistance of an absolute authority capable of forcing natural order upon recalcitrant humans.

Montesquieu’s philosophy of Social Darwinism (survival of the economically fittest), libertarian politics, and libertarian economics were imported to America by Pierre Samuel DuPont, Thomas Jefferson, Benjamin Franklin, and James Madison thereby establishing America as the first libertarian state.

The principal functions of America’s new libertarian government were two:

#1. To protect private property.

#2. To force men to act economically.

For the first time in human history, all day-to-day political decisions became economic decisions.

The market system was a new politics to replace feudalism (click to open)

There is madness in their method [Chapter 7 of Steve Keen (2001).Debunking Economics, Pluto Press & Zed Books, Sydney.]

Why assumptions do matter, and why economics is so different to the true sciences

“Economics as a discipline arose at a time when English society was in the final stages of removing the controls of the feudal system from its mercantile/capitalist economy. In this climate, economic theory had a definite (and beneficial) political role: it provided a counter to the religious ideology that once supported the feudal order, and which still influenced how people thought about society. In the feudal system the pre-ordained hierarchy of king, lord, servant and serf was justified on the basis of the ‘divine right of Kings.’ The King was God’s representative on earth, and the social structure which flowed down from him was a reflection of God’s wishes.

“This structure was nothing if not ordered, but this order imposed severe restrictions on the now dominant classes of merchants and industrialists. At virtually every step, merchants were met with government controls and tariffs. When they railed against these imposts, the reply came back that they were needed to ensure social order.

“Economic theory—then rightly called political economy—provided the merchants with a crucial ideological rejoinder. A system of government was not needed to ensure order: instead, social order would arise naturally in a market system in which each individual followed his own self-interest. Smith’s phrase ‘the invisible hand’ came along rather late in the process, but the notion played a key role in the political and social transformations of the late 18th and early 19th centuries.

An essential aspect of this market social order was equilibrium.

“From the outset, economists presumed that the market system would achieve equilibrium. Indeed, the achievement of equilibrium was often touted as an advantage of the free market over any system where prices were set by fiat. Equilibrium was therefore an essential notion of the economic defence of capitalism: the equilibrium of the capitalist market would replace the legislative order of the now defunct feudal hierarchy.

“More importantly, whereas the feudal order endowed only the well-born with welfare, the equilibrium of the market would guarantee the best possible welfare for all members of society. The level of individual welfare would reflect the individual’s contribution to society: people would enjoy the lifestyle they deserved, rather than the lifestyle into which they had been born.

“If, instead of equilibrium, economists had promised that capitalism would deliver chaos; if, instead of meritocracy, economists had said that the market could concentrate inequality, then economists could have hindered rather than helped the transition to capitalism (though they more likely would have been ignored).

“By the middle of the 19th century, the transition to capitalism was complete: what was left of feudalism was a mere vestige. But rather than the promised equilibrium, 19th century capitalism was wracked by cycles and enormous disparities of wealth. A major depression occurred roughly every 20 years, workers’ conditions would improve and then rapidly deteriorate, prices rise and then fall, banks expand and then collapse. New `robber barons’ replaced the barons of old. It appeared that, while promising a meritocratic equilibrium, capitalism had instead delivered unbalanced chaos. A new political challenge arose: that of socialism.

“Once again, economics rose to the challenge, and once again equilibrium was a central tenet. This time the defence was mounted by what we today call neoclassical economics, since classical economics had been turned into a weapon against capitalism by the last great classical economist, Karl Marx.

“In contrast to the hand-waving of Smith, the neoclassical economists of the late 19th century provided a substantive mathematical analysis of how equilibrium could be achieved by an idealised market economy, and how this equilibrium could be fair to all. However, unlike the earlier classical championing of capitalism, this technical edifice provided very little in the way of libertarian slogans for the battle against the ideology of socialism. Instead of arming capitalism’s defenders with rhetoric to deploy against socialists, it gave birth to the academic discipline of economics.

“Capitalism eventually transcended the challenge of socialism, with little real assistance from economic theory. But while the economics had little impact upon capitalism, the need to defend capitalism had a profound impact upon the nature of economic theory. The defensive imperative, and the role of equilibrium in that defence, cemented equilibrium’s role as a core belief of economic theory.

“At the beginning of the 3rd millennium, there is no competing social system against which capitalism must prove its superiority. Feudalism is long dead, and those socialist societies which remain are either socialist in name only, or bit players on the world stage.

“Today, most economists imperiously dismiss the notion that ideology plays any part in their thinking. The profession has in fact devised the term `positive economics’ to signify economic theory without any value judgments, while describing economics with value judgments as `normative economics’—and the positive is exalted far above the normative.

“Yet ideology innately lurks within ‘positive economics’ in the form of the core belief in equilibrium.[3] As previous chapters have shown, economic theory has contorted itself to ensure that it reaches the conclusion that a market economy will achieve equilibrium.[4] The defence of this core belief is what has made economics so resistant to change, since virtually every challenge to economic theory has called upon it to abandon the concept of equilibrium. It has refused to do so, and thus each challenge—Sraffa’s critique, the calamity of the Great Depression, Keynes’s challenge, the modern science of complexity—has been repulsed, ignored, or belittled.

“This core belief explains why economists tend to be extreme conservatives on major policy debates, while simultaneously believing that they are non-ideological, and are in fact motivated by knowledge rather than bias.

“If you believe that a free market system will naturally tend towards equilibrium—and also that equilibrium embodies the highest possible welfare for the highest number—then ipso facto, any system other than a complete free market will produce disequilibrium and reduce welfare. You will therefore oppose minimum wage legislation and social security payments—because they will lead to disequilibrium in the labour market. You will oppose price controls—because they will cause disequilibrium in product markets. You will argue for private provision of services—such as education, health, welfare, perhaps even police—because governments, untrammeled by the discipline of supply and demand, will either under or oversupply the market (and charge too much or too little for the service).

“In fact, the only policies you will support are ones that makes the real world conform more closely to your economic model. Thus you may support anti-monopoly laws—because your theory tells you that monopolies are bad. You may support anti-union laws, because your theory asserts that collective bargaining will distort labour market outcomes.

“And you will do all this without being ideological.

“Really?

“Yes, really—in that most economists genuinely believe that their policy positions are informed by scientific knowledge, rather than by personal bias or religious-style dogma. Economists are truly sincere in their belief that their policy recommendations will make the world a better place for everyone in it—so sincere, in fact, that they often act against their own self-interest.

“For example, there is little doubt that an effective academic union could increase the wages paid to academic economists. If economists were truly self-motivated—if they behaved like the entirely self-interested rational economic man of their models—they would do well to support academic unions, since the negative impacts they predict unions to have would fall on other individuals (fee-paying students and unemployed academics). But instead, one often finds that economists are the least unionised of academics, and they frequently argue against actions that, according to their theories, could conceivably benefit the minority of academics at the expense of the greater community. However ideological economists may appear to their critics, in their hearts they are sincerely non-partisan—and, ironically, altruistic.

“But non-partisan in self-belief does not mean non-partisan in reality. With equilibrium both encapsulating and obscuring so many ideological issues in economics, the slavish devotion to the concept forces economists into politically reactionary and intellectually contradictory positions.

“Of course, if economists were right that equilibrium embodies the best possible outcome for the greatest number, then their apparently ideological policy positions would be justified—if the economy always headed back to equilibrium when disturbed from its Nirvana. In the next chapter, we’ll put aside the critiques which establish that the building blocks of equilibrium are invalid, and instead ask whether economic equilibrium, as defined by economic theory, is in fact stable.

Everything you ever wanted to know about economics can be found at:
http://debunkingeconomics.com/oldindex.htm
http://www.jayhanson.org/_Economics/TheDeathOfEconomics.pdf
http://www.jayhanson.org/_Economics/Nitzan and Bichler - Capital As Power.pdf

 

 

American History Videos (click to open)

A award-winning BBC series by Adam Curtis!

THE CENTURY OF SELF FULL LENGTH
Watch episode 1 - Happiness Machines
Watch episode 2 - The Engineering of Consent
Watch episode 3 - There is a Policeman Inside All Our Heads: He Must Be Destroyed
Watch episode 4 - Eight People Sipping Wine in Kettering

THE TRAP
Watch episode 1 - F**k You Buddy
Watch episode 2 - The Lonely Robot
Watch episode 3 - We Will Force You To Be Free

THE POWER OF NIGHTMARES
Watch episode 1 - Baby It ’s Cold Outside
Watch episode 2 - The Phantom Victory
Watch episode 3 - The Shadows in the Cave

 

 

ECONOMIC THEORY FOR SCIENTISTS AND ENGINEERS

economics

The members of the American economics profession, as [Thurman] Arnold contended, performed a vital practical role in maintaining this unique system of corporate socialism American style. It was their role to prevent the American public from achieving a correct understanding of the actual workings of the American economic system. Economists instead were assigned the task to dispense priestly blessings that would allow business to operate independent of damaging political manipulation. They accomplished this task by means of their message of “laissez faire religion, based on a conception of a society composed of competing individuals.” However false as a description of the actual U.S. economy, this vision in the mind of the American public was in practice “transferred automatically to industrial organizations with nation-wide power and dictatorial forms of government.” Even though the arguments of economists were misleading and largely fictional, the practical—and beneficial—result of their deception was to throw a “mantle of protection … over corporate government” from various forms of outside interference. Admittedly, as the economic “symbolism got farther and farther from reality, it required more and more ceremony to keep it up.” But as long as this arrangement worked and there could be maintained “the little pictures in the back of the head of the ordinary man,” the effect was salutary—“the great [corporate] organization was secure in its freedom and independence.” It was this very freedom and independence of business professionals to pursue the correct scientific answer—the efficient answer—on which the economic progress of the United States depended.
Robert H. Nelson, REACHING FOR HEAVEN ON EARTH

Economics satisfied the two most basic needs of investment bankers. First, bankers wanted practical people, willing to subordinate their education to their careers. Economics seemed designed as a sifting device. Economics was practical. It got people jobs. And it did this because it demonstrated that they were among the most fervent believers in the primacy of economic life... The only inexplicable part of the process was that economic theory (which is what, after all, economics students were supposed to know) served almost no function in an investment bank.
Michael Lewis, LIAR’S POKER

Economists have been carrying coal to Newcastle since Adam Smith provided English merchants with a rationalization of what they had always wanted to do: treat their fellow human beings as beasts of burden. Economists continue to perform the same function. John Kozy


Robert Nelson tells us that the goal of the economics profession is to prevent the American public from achieving a correct understanding the market system, thereby throwing a “mantel of protection over corporate government!”

Economists base their political program on several known-false assumptions, which lead to a focal belief called “Pareto optimality.” “Pareto optimality” is not scientific because it is not defined in a way that can be falsified. “Pareto optimality” is a belief in the same sense as “Christ died for our sins” is a belief—neither can be falsified. Economists proselytize for their doctrinal beliefs like Christian missionaries proselytize for theirs.

The belief that “Pareto optimality” occurs in the real world is the linchpin of the contemporary economic rationale. If one accepts that “Pareto optimality” actually occurs, then market exchanges are beneficial by definition. Conversely, if exchanges weren't beneficial, the entire argument for market solutions would disappear:

“The neoclassical school is the dominant (and probably the numerically largest) school in contemporary economics. For neoclassical economists, microeconomic theory (i.e., welfare economics) underlies every theoretical subfield of specialization and every theoretical, practical, and policy-oriented conclusion at which they arrive. All of their cost-benefit analyses, their demonstrations of the universal gains from foreign trade, their notions of market efficiency that are encountered in every branch of applied economics, as well as their notion of rational prices, have absolutely no meaning whatsoever other than that manifested in their faith that a free-enterprise, competitive market system will tend toward a Pareto optimal situation. Without a Pareto optimal situation in effect, these phrases and notions cannot be defended. In fact, in the absence of an optimal situation, these phrases have no meaning whatsoever. They are given meaning only when the neoclassical economists first posit the existence of a Pareto optimum; then, by definition, all exchangers are said to gain, resources are said to be ‘efficiently allocated,’ prices are said to be ‘rational’ and therefore conducive to making accurate assessments—on utilitarian grounds—of the social costs and social benefits of various government projects. Utilitarian neoclassical welfare economics pervades and dominates nearly all neoclassical analyses on all theoretical and practical matters.” (Emphasis in original)—HISTORY OF ECONOMIC THOUGHT: A CRITICAL PERSPECTIVE, Third Edition, E. K. Hunt & Mark Lautzenheiser, 2011

Economics is confusing, but after fifteen years of study, I have cut through the jargon, math, and can explain economics in just one sentence: Economics is an expression of political agendas that are hidden within known-false assumptions. I attribute the absolutely brilliant tactic of furthering hidden agendas with known-false assumptions to one man: Milton Friedman.

In 1948, economist Milton Friedman and psychologist Leonard Savage proposed the application of mathematical rationality to all economic choice situations that involve uncertainty. In Friedman’s proposed mathematical model, consumers decide by instantly solving probability equations without even knowing it!

In 1952, Maurice Allais tested the Friedman/Savage mathematical model and found that it did not correctly predict consumer behavior:

“A test of the theory’s validity was presented to Savage by Maurice Allais over lunch, during a conference in Paris in 1952. Allais made Savage fill out a list of questions with which he could show that Savage violated his own theory. The history of Allais’ paradox (as it became known) is in itself intriguing. It seems that several other researchers, amongst whom Friedman, when presented with the same questions some months later passed the test.

“Furthermore, the Allais paradox remained practically unknown until some twenty years later. But what was decisive for subsequent developments in economics and psychology, was that Savage took the critique of Allais seriously whereas Friedman, as far as I can tell, put the whole subject aside. Friedman left EUT as a basis for decision and game theory without further comments as a positive (as-if) theory; Savage retreated into a normative account of the theory.”—Floris Heukelom, Kahneman and Tversky and the Origin of Behavioral Economics, 2007

Indeed, modern biologists have found that consumers are not like the mathematical model, instead of mathematical, they are logical—they respond logically to environmental cues:

“People surely do use some sort of logic. All languages have logical terms like not, and, same, equivalent, and opposite. Children use and, not, or, and if appropriately before they turn three, not only in English but in half a dozen other languages that have been studied. Logical inferences are ubiquitous in human thought, particularly when we understand language. … Logic is indispensable in inferring true things about the world from piecemeal facts acquired from other people via language or from one’s own generalizations.”—Steven Pinker, HOW THE MIND WORKS, 1997

Even after he knew his model failed, Friedman continued to deceive his students by claiming that it hadn’t failed, and then used his failed model—the assumption of mathematical rationality—to further his libertarian agenda:

“Adam Smith’s key insight was that both parties to an exchange can benefit and that, so long as cooperation is strictly voluntary, no exchange will take place unless both parties do benefit.”—Milton & Rose Friedman, 1980

Friedman’s claim could only be true if consumers could make mathematically-rational decisions in the marketplace—they can’t. When Friedman’s students challenged his unbelievable model, he tried to explain it away with more deceptions:

“To be important, therefore, a hypothesis must be descriptively false in its assumptions…”—Milton Friedman, 1953

“[ In 1955,] Friedman provided a defense of RCT (his mathematical model) that, in one way or another, still commands the respect of many of its practitioners… Friedman argued that in accepting or dismissing a theory, we should only look at its fit with the data, not at the realism (or lack thereof) of its assumptions. Bluntly speaking, he urged us to apply to theories the principle we often apply to sausages: as far as the final product is good, better not to ask about the ingredients. This is the famous ‘as if’ defense of RCT: however implausible an assumption may seem, it is acceptable as long as humans behave ‘as if’ it were true.”—Louis Fernando Molina, 2004

Nevertheless, humans do not behave “as if” Friedman’s model were true! Friedman’s model failed when it was tested in 1952! Moreover, his model fails consistently in repeatable experiments. This is well documented in the work of Daniel Kahneman, who won the 2002 Nobel in economics:

“Kahneman and Tversky proved in numerous experiments that the day-to-day reality of decision makers varies from the assumptions held by economists.”—Goldberg and von Nitzsch, 2001

For over 50 years, mainstream economics has been based on the known-false assumption of mathematical rationality!

WELL, IS FRIEDMAN TELLING THE TRUTH? MUST ASSUMPTIONS BE FALSE? DO ASSSUMPTIONS MATTER? (click to open)

In REFLECTION WITHOUT RULES, D. Wade Hands explains why assumptions do matter. What follows here is all a direct quote:

Hausman begins by summarizing Friedman’s “assumptions do not matter” argument in the following way:

1. A good hypothesis provides valid and meaningful predictions concerning the class of phenomena it is intended to explain (premise).
2. The only test of whether an hypothesis is a good hypothesis is whether it provides valid and meaningful predictions concerning the class of phenomena it is intended to explain (invalidly from 1).
3. Any other facts about an hypothesis, including whether its assumptions are realistic, are irrelevant to its scientific assessment (trivially from 2). (Hausman 1992, p. 166)

The main problem with the argument is that is it not a valid “argument” at all: Statement 2 is not true and it does not follow from statement 1. Hausman uses the following analogous argument to make his point:

1’ A good used car drives reliably (over-simplified premise).
2’ The only test of whether a used car is a good used car is whether it drives reliably (invalidly from 1’).
3’ Anything one discovers by opening the hood and checking the separate components of a used car is irrelevant to its assessment (trivially from 2’). (Hausman 1992, p. 166)

The problem is of course that with a used car or an economic model the relevant issue is how well it will perform in the future and in other circumstances. Theory should be a guide—even if we focus on empirical prediction—to new circumstances and new situations, and for those forward-looking applications examining the parts (the assumptions) matter. In fact, though Hausman does not make this point, Friedman’s emphasis on novel facts gives away his commitment to successful future performance, but Friedman never closes the circle. Friedman seems to be making the implicit assumption that success in one novel situation improves the probability of success in additional and/or future novel situations that we might have an interest in, but there is no obvious reason for this to be the case. Such issues actually carry the discussion beyond Friedman’s essay and into debates about “realism” and “instrumentalism” in the philosophy of science: a discussion that must wait until the next chapter. At this point I just want to note that Hausman’s criticism of Friedman seems to be correct—even if one is only interested in prediction, the assumptions still matter.

 

 

Friedman’s deceptions were published as “The Methodology of Positive Economics” (1953) which is clearly the best-known work in twentieth-century economic methodology. It was “a marketing masterpiece” (Caldwell 1982, p. 173) that is cited in nearly every economics textbook, and it remains, almost a half-century after its publication, “the only essay on methodology that a large number, perhaps majority, of economists have ever read” (Hausman 1992, p. 162). D. Wade Hands, 2001

Friedman’s disproved mathematical model ultimately became the so-called “Standard Social Science Model” (SSSM) that has dominated the behavioral sciences, colored popular thought, and, by its pervasiveness, directly and indirectly influenced public policy for over 50 years!

Economics is the intellectual “Trojan Horse” of our time with political propaganda hidden by known-false assumptions. The conclusions follow logically from the deception, so if you accept the known-false assumptions, then you accept the deception:

“Economists enamored of pure markets begin with the theory, and hang models on assumptions that cannot themselves be challenged. The characteristic grammatical usage is an unusual subjunctive—the verb form ‘must be.’ For example, if wages for manual workers are declining, it must be that their economic value is declining. If a corporate raider walks away from a deal with half a billion dollars, it must be that he added that much value to the economy. If Japan can produce better autos than Detroit, there must be some inherent locational logic, else the market would not dictate that result. If commercial advertising leads consumers to buy shoddy or harmful products, they must be ‘maximizing their utility’—because we know by assumption that consumers always maximize their utility. How do we know that? Because to do anything else would be irrational. And how do we know that individuals always behave rationally? Because that is the premise from which we begin. The truly interesting institutional questions—the disjunctures between what free-market assumptions would predict and the actual outcomes—are dismissed by the tautological and deductive form of reasoning. The fact that the real world is already far from a perfect market is ignored for the sake of theoretic convenience. The dissenter cannot challenge the theory; he can only describe the real world.”—Robert Kuttner, EVERYTHING FOR SALE

SEVEN UNSCIENTIFIC ASPECTS OF ECONOMICS

POLITICS:
n 1: social relations involving authority or power

Leaving aside the question of whether economics has ever accurately predicted anything, the argument that “the more significant the theory, the more unrealistic are the assumptions” is simply bad philosophy.—Steve Keen, 2001

“Economics” is an intellectual Trojan Horse with political agendas hidden within known-false assumptions. The political conclusions follow logically from the assumptions, so if you accept those known-false assumptions, then you also accept those hidden political agendas.
—Jay Hanson

Advertising is legalized lying.H.G. Wells


Unscientific Aspect #1: Economists assume that the world economy is powered by money rather than by energy (click to open)

Unscientific Aspect #1: Economists assume that the world economy is powered by money rather than by energy:

“Minerals are inexhaustible and will never be depleted. A stream of investment creates additions to proved reserves, a very large in-ground inventory, constantly renewed as it is extracted… How much was in the ground at the start and how much will be left at the end are unknown and irrelevant… There are plenty of fossil fuels and no limit to potential electrical capacity. It is all a matter of money.”
M. A. Adelman, 1993

Even Nobel-prize winning economists believe that money creates resources:

“…the world can, in effect, get along without natural resources… at some finite cost, production can be freed of dependence on exhaustible resources altogether.”
Nobel winner Robert Solow, 1974

But physical scientists know that all resources are natural and that economists have lost touch with reality:

“One must have a very erroneous view of the economic process as a whole not to see that there are no material factors other than natural resources. To maintain further that ‘the world can, in effect, get along without natural resources’ is to ignore the difference between the actual world and the Garden of Eden.”
Georgescu-Roegen, 1975

Neoclassical economists hoped they could gain social status by mimicking old-fashioned physics:

“[ With the development of modern physics ] it became possible to see orthodox economic theory for what it really was: a bowdlerized imitation of nineteenth-century physics [ with money replacing energy ].”
Philip Mirowski, 1988


Almost 150 years ago, physical scientists attempted to convince economists that the economy was powered by energy instead of money:

“It is, in fact, the fate of all kinds of energy of position to be ultimately converted into energy of motion. The former may be compared to money in a bank, or capital, the latter to money which we are in the act of spending … If we pursue the analogy a step further, we shall see that the great capitalist is respected because he has the disposal of a great quantity of energy; and that whether he be nobleman or sovereign, or a general in command, he is powerful only from having something which enables him to make use of the services of others. When a man of wealth pays a labouring man to work for him, he is in truth converting so much of his energy of position into actual energy… The world of mechanism is not a manufactory, in which energy is created, but rather a mart, into which we may bring energy of one kind and change or barter it for an equivalent of another kind, that suits us better—but if we come with nothing in hand, with nothing we will most assuredly return.”
—Balfour Stewart, 1883

 

 

Unscientific Aspect #2: Economists select known-to-be-false-hypothetical assumptions (click to open)

Unscientific Aspect #2: Economists select known-to-be-false-hypothetical assumptions so they can mislead the public into supporting their political agendas (e.g., market efficiency, Homo economicus, advertising, money):

“Neoclassical economics is based on the premise that models that characterize rational, optimizing behavior also characterize actual human behavior.”—R. Thaler, 1987

The “rational, optimizing behavior” model at the center of modern economics fails consistently in repeatable experiments. This is well documented in the work of Daniel Kahneman who won the 2002 Nobel in economics:

“Kahneman and Tversky proved in numerous experiments that the day-to-day reality of decision makers varies from the assumptions held by economists.”—Goldberg and von Nitzsch, 2001

Here is a partial list of exceptions to “rational, optimizing behavior”: List of cognitive biases

Economists prefer lies to truth and don’t care if their theories are known-to-be-wrong:

“Contrary behavioral evidence has had little impact on economics because having a theory of how the world ‘ought’ to act, economists can reject all manner of evidence showing that individuals are not rational utility maximizers.”—Lester Thurow, 1983

You may call it what you wish. I call it “lying”—so does Herman Daly:

“We must stop crying to the growing economy, ‘Deliver me, for thou are my god!’ Instead, we must have the courage to ask with Isaiah, ‘Is there not a lie in my right hand?’”—Herman Daly

 

 

Unscientific Aspect #3: Economists assume that “money” is only a “medium of exchange” (click to open)

Unscientific Aspect #3: Economists assume that “money” is only a “medium of exchange”:

MONEY: Anything which is widely acceptable in exchange for goods, or in settling debts, not for itself but because it can be similarly passed on, has the character of money since it serves the primary function of money, i.e. a means of payment. As a means of payment money is an entity which is transferred when a payment is made; as such it acts as a medium of exchange, a function essential to any economy other than the most primitive.” [p. 285, THE MIT DICTIONARY OF ECONOMICS]

But even the casual observer can see that money is social power because it “empowers” people to buy and do the things they want—including buying and doing other people: politics.

If employers have the freedom to pay workers less “political power,” then they will retain more political power for themselves. Money is, in a word, “political,” and “economic efficiency” is correctly seen as a political concept designed to conserve political power for those who have it—to make the politically powerful, even more powerful, and the politically weak, even weaker.

Our national currency provided the means for moneyed interests to capture our formal political system.

 

 

Unscientific Aspect #4: The economic unit of measure is a “transitory effect”—not a “cause.” (click to open)

Unscientific Aspect #4: The economic unit of measure is “price”—which is a “transitory effect”—not a “cause.” For example, a dollar’s worth of oil today will not be a dollar’s worth of oil tomorrow. Thus, today’s economic assumptions used to create a Nobel-Prize-winning economic model—which is a correlation of transitory effects—may be worthless tomorrow:

The Nobel-Prize-winning Black-Scholes-Merton model failed spectacularly in 1998 after losing $4.6 billion in less than four months. To save the U.S. banking system, then-Federal Reserve Chairman Alan Greenspan personally convinced 14 banks to remain invested in Long Term Capital Management, thereby averting disaster.—Wikipedia

 

Unscientific Aspect #5: The economic method is “correlation”of transitory effects (click to open)

Unscientific Aspect #5: The economic method is “correlation” (this happened before that happened, and thus assume, that it must have caused it) of transitory effects. Correlation is also called “magical thinking” for the obvious reasons:

“Note as well that the isoquant hits the vertical axis at point A, indicating that we can produce future output level Q* with no oil and gas. How is this possible?”
Paul Samuelson and William Nordhaus

Economists can make any lie seem like the truth by carefully selecting assumptions and cherry-picking the data:

“There are three kinds of lies: lies, damned lies, and statistics.”
Mark Twain

 

 

Unscientific Aspect #6: The “ceteris paribus” assumption (click to open)

Unscientific Aspect #6: The “ceteris paribus” assumption further reinforces the unrealistic—and unscientific—nature of economic correlation:

“We show there the amounts of the two kinds of capital that would be required to attain a certain level of output in the future (Q*), holding other inputs constant.
Paul Samuelson and William Nordhaus

Real scientists do not hold “other inputs constant”:

“The unscientific nature of ordinal utility theory was further shown to be reinforced by the insulating role played by the ceteris paribus proviso.”
L.D. Keita

 

 

Unscientific Aspect #7: Economics is always “political” (click to open)

Unscientific Aspect #7: Economics is always “political” (it always implies how we should behave). Every economic theory assumes to know what is best for us. Economists always publish to support specific political agendas:

“Should we be taking steps to limit the use of these most precious stocks of society’s capital so that they will still be available for our grandchildren? … in the long run, oil and gas are not essential.”—Paul Samuelson and William Nordhaus

Real science is not inherently normative:

“It is impossible to define ‘good,’ ‘service,’ or even ‘utility’ without making ethical judgments. Every object has mass, but not every object has utility.”—George Brockway, 1995


“No discipline [ except economics ] attempts to make the world act as it thinks the world should act.”—Lester Thurow, 1983

 

 

What did we learn? If the so-called “scientific” aspects of economics are nonsense what are we left with? Politics! Thus, we can cut through the jargon, math, and explain the discipline of economics in just one sentence: “economics” is an expression of political agendas within hidden known-false assumptions; the economics department teaches political ideals in disguise:

“The vocabulary of physics is amoral—not antimoral, but amoral. Mass, force, and velocity have no moral implications because the laws describing them have no alternatives. The vocabulary of economics, in contrast, abounds in ethical terms. It is impossible to define ‘good,’ ‘service,’ or even ‘utility’ without making ethical judgments. Every object has mass, but not every object has utility. Moreover, some people may consider a certain object a good while others do not, but there can be no disagreement about the equivalence and direction of action and reaction. There is no other or better way for a body to fall in a vacuum than v(t)=-gt+vo y(t)=-1/2gt^2+vot+yo; this is not because physicists don’t happen to be interested in making this a better world. There is no unchanging price for a bushel of wheat; and this is not because economists don’t happen to be interested in a stable universe. The price of wheat depends upon what people do, but bodies fall as they do regardless of what people do or think... Economics is not value free, and no amount of abstraction can make it value free. The econometricians’ search for equations that will explain the economy is forever doomed to frustration. It is often said that their models don’t work, because, on the one hand, the variables are too many and, on the other, the statistical data are too sparse. But the physical universe is as various as the economic universe (they are, to repeat, both infinite), and Newton had fewer data and less powerful means of calculation than are at the disposal of Jan Tinbergen and his econometrician followers. The difference is fundamental, and the failure to understand it reduces much of modern economics to a game that unfortunately has serious consequences.”
—George Brockway, 1995

“The problem is, of course, that not only is economics bankrupt but it has always been nothing more than politics in disguise … economics is a form of brain damage.”
—Hazel Henderson


More on the Unscientific Aspects of Economics including “Game Theory” (click to open)

Besides being the centerpiece of modern economics, Friedman’s known-false assumption of mathematical rationality is also used in “Game Theory!” The following BBC 17 minute video will explain the history and known-failure of Game Theory

The following study by Paul Glimcher illustrates the deliberate mis-characterization of facts by economists. D. G. C. Harper (the biologist who actually did the experiment) claimed that the ducks decided where to swim by responding to “environmental cues.” Glimcher is claiming that ducks decide where to swim by mathematically solving probability equations:

“Harper’s experiment was critical because it tested the idea that the ducks could reach this kind of stable Nash equilibrium.”—Paul W. Glimcher, 2002


“Nash Equilibrium” is a Game Theory model that is based on the known-false assumption of mathematical rationality. Biologists tell us that mathematical rationality could not have evolved. No animal decides what to do by dynamically solving math problems subconsciously:

“…neither human engineers nor evolution can build a computational device that exhibits these forms of unbounded rationality, because such architectures are impossible, even in principle.”—John Toby and Leda Cosmides


What about “Bounded” versus “Unbounded” Rationality?

“Another school of thought, whose theory of rationality is called optimization under constraints, has offered a possible escape from these interminable calculations. They recognize that computational resources are limited and that stopping rules are needed to determine when enough possible outcomes have been evaluated. To accomplish this, they suggest that we should evaluate whether considering each successive outcome justifies the additional computational costs of doing so. Now, this is not a solution! It compounds the problem by adding an additional layer of computation: Not only do the outcomes have to be evaluated, but also the benefits of performing each evaluation have to be weighed. Optimization tinder constraints requires even more cognitive resources than the approach it claims to simplify, and thus it represents just another version of unbounded rationality.

Gigerenzer and Todd’s alternative to these computational nightmares is what they call bounded rationality. It explicitly recognizes that computational resources are limited and that speed is often critical in real-world decision situations. Thus evolution should build what Gigerenzer calls fast and frugal heuristics that solve real-world problems quickly with a minimum of information. A heuristic could be a simple rule of thumb (for example, if it’s bigger than a bluejay, it’s probably a hawk), or it may involve a few more steps. But the computationally bulky approaches of unbounded rationality and optimization under constraints are far too complex to qualify as heuristics.”—EVOLUTIONARY PSYCHOLOGY


Maurice Allais falsified in Game Theory in 1952! In fact, people consistently fail to act according to Game Theory models in repeated experiments (e.g. the Ultimatum Game). However, that fact that the model fails consistently, has not changed the assumption of mainstream economists:

“In a classic experiment, Harper (1982) tested the ability of a flock of ducks to achieve a stable Nash equilibrium when fed balls of bread.”—J. M. Gowdy, 2007    ( Nash was insane.    Game theory is propaganda at its finest! )

Mathematical rationality and Game Theory were falsified in 1952! Yet eight game theorists have won Nobel prizes in economics. John Maynard Smith was awarded the Crafoord Prize for his application of game theory to biology. Yet, Game Theory does not describe how any animal makes decisions:

“A test of the theory’s validity was presented to Savage by Maurice Allais over lunch, during a conference in Paris in 1952. Allais made Savage fill out a list of questions with which he could show that Savage violated his own theory. The history of Allais’ paradox (as it became known) is in itself intriguing. It seems that several other researchers, amongst whom Friedman, when presented with the same questions some months later passed the test.

“Furthermore, the Allais paradox remained practically unknown until some twenty years later. But what was decisive for subsequent developments in economics and psychology, was that Savage took the critique of Allais seriously whereas Friedman, as far as I can tell, put the whole subject aside. Friedman left EUT as a basis for decision and game theory without further comments as a positive (as-if) theory; Savage retreated into a normative account of the theory.”

Download the entire paper at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956887

More on Friedman’s world-destroying lie, which ultimately became know as the “F Twist,” can be found here: http://www.debunkingeconomics.com/Sample/method.htm#F-twist

Humans cannot maximize. Therefore, the market is not efficient. Therefore, the world does not need economists!


Everything you ever wanted to know about economics can be found at:
http://www.debunking-economics.com/Sample/method.htm
http://www.jayhanson.org/_Economics/TheDeathOfEconomics.pdf
http://www.jayhanson.org/_Economics/Nitzan and Bichler - Capital As Power.pdf


AGAINST MECHANISM: Protecting Economics From Science, Philip Mirowski, 1988;

[p. 6 ] “Chapters 2 and 3 demonstrate that is was not so much the methods of science that were appropriated by the early neoclassicals as it was the appearances of science, for the early neoclassicals possessed a singularity inept understanding of the physics that they so admired. Chapters 1 and 2 also introduce the crucial concept of economic conservation principles, perhaps the most neglected and yet most significant clue to the scientific pretensions of neoclassical economic theory.

“Another antidote to the widespread ailment of scientism in economics is an examination of the various philosophical preconceptions that are freighted in as part of an unthinking acquiescence to ‘mathematical rigor.’ In Part 2 the relationship of the first institutionalist program in economics to mathematical models is examined from various angles and aspects. First, the assertion that there is a ‘New Institutional Economics’ of an orthodox cast is evaluated in Chapters 4 and 5. Basically, the argument there is that neoclassical economists have tried to preempt the questions of the institutionalist school by attempting to reduce all social institutions such as money, property rights, and the market itself to epiphenomena of individual constrained optimization calculations. All these attempts have failed, despite their supposed dependence upon mathematical rigor, because they always inadvertently assume what they aim to deduce.”

[pp. 45-48]

JEVONS’ SUNSPOTS

Macroeconomic Instability and the ‘Natural’ Process in Early Neoclassical Economics

“It may seem odd to disinter an economic theory—in this instance, William Stanley Jevons’s claim that sunspots caused macroeconomic fluctuations—which no one now believes or much cares about. In fact, my purpose is not to scoff at a dead theory, but to use it as a pretext to discuss the following issues: economic historians often have suggested a dichotomy between a premodern and industrial macroeconomy, with the premodern economy largely at the mercy of weather and other natural phenomena; this dichotomy is rooted in early neoclassical economic theory (here restricting ourselves to Jevons); there is little historical evidence that premodern macro fluctuations were caused by natural disturbances, such as the weather (here restricting ourselves to the case of England); and the above three theses have some interesting implications for the way economic policy is conceived, both then and now.

“William Stanley Jevons, in his 1870 Presidential Address before the British Association for the Advancement of Science, Section F, lamented that, ‘There is no one who occupies a less enviable position than the political economist. Cultivating the frontier regions between certain knowledge and conjecture, his efforts and advice are scorned and rejected on all hands.’ Although this may prompt nods of assent in the 1980s, it is important to understand the historical context of such complaints. As he said later in the same address, ‘The growth of the arts and manufactures and the establishment of free trade have opened the widest means of employment and brought an accession of wealth previously unknown… Nevertheless within the past few years we have seen pauperism almost as prevalent as ever, and the slightest relapse of trade throws whole towns and classes of people into a state of destitution little short of famine.’

“The problem of English political economy in the 1870s was its firm association with the doctrine of free trade, which in turn was a direct corollary of the fundamental theoretical principle that unfettered market structures were a superior means of organizing production and distribution. In periods of buoyancy such a stance was easy to defend; but by the 1870s doubts became more insistent in England: doubts about the stability of market organization, which resulted in sharp aggregate fluctuations, and doubts about the long-term efficacy of free trade due to the successes of Britain’s foreign economic rivals. Jevons personally had felt these chill winds when his father’s iron firm was bankrupted in 1848, and his family bore the stigma of being the ‘poor relations.’ This experience did not sour Jevons on free trade and the efficacy of market organization, however, because he felt that by hard work from an early age he had managed, in the face of adversity, to improve his station in life, and further that such an avenue was open to all who would but avail themselves of it. In practice, the early Jevons responded to the mistrust of political economy by blaming the victims. But, as he soon came to understand, that was not a winning strategy.

“All of Jevons’s innovations in economics—his pioneering efforts in marginalist price theory, his work on the Coal Question, and his sunspot theory—may be understood as a unified rational response to the increasing skepticism about political economy in Britain. Economists in the late twentieth century tend to view the innovations in price theory as Jevons’s crowning achievement and the sunspot theory as some unfortunate lapse, or even an embarrassment. Indeed, for some the sunspot theory has attained the status of joke, whereas for others it is a cautionary parable concerning the pitfalls of inductive argument. All of these interpretations are much too facile, because they ignore the unified thrust of Jevons’s theoretical project. In short, his project was to portray the market as a ‘natural’ process, so that doubts about its efficacy would be assuaged, or at the very least, countered by scientific discourse. The ultimate object was to reconstruct the foundations of the case for free trade.

“In the case of neoclassical price theory the evidence for this thesis is extensive, but would be superfluous in the present context; in any event it is summarized above. Briefly, Jevons’s price theory laid claim to scientific status because it was identical in mathematical form and analytical content to the physics of the mid-nineteenth century, which is sometimes referred to as ‘energetics’ by historians of science. For our present purposes, it is only necessary to survey the broadest implications of this stratagem. First, it drew a direct analogy between economic transactions and transfers of energy, which subtly endowed the transactions with the ‘natural’ ontological status of the transfers. Second, it encouraged specialization within economics and the cultivation of an internal language (mathematics), which served to buffer the discipline from the intrusions of lay critics. Third, it demonstrated that market processes maximized utility in a regime of free competition, thus implying that no improvement was possible through conscious intervention in production and exchange. These were a much more formidable set of defenses of the doctrine of free trade than those provided by the demoralized and disheveled remnants of classical political economy.

“However, effective these new foundations, they did not address the most significant objection to British political economy: If free trade was such an able method of economic coordination, why did it result in such devastating contractions punctuating economic expansion? In this respect, Jevons’s sunspot theory was the necessary adjunct to his newly formulated price theory. If the market always functioned in an effective manner tended toward a configuration insuring maximum happiness, then there was only one obvious way to explain the incongruity of the misery and suffering of depressions. The natural operation of the market could only be deflected or stymied (although never fully neutralized) by another opposing ‘natural’ force—here Jevons proposed that macroeconomic fluctuations and credit crises were caused by meteorological disturbances, ultimately caused in turn by variations in sunspot activity. The advantage of this sort of explanation was that no one was to blame, or as Jevons put it, ‘We must not lay to the charge of trades-unions, or free trade, or any other pretext, a fluctuation of commerce which affects countries alike which have trades-unions and no trades-unions, free trade and protection; as to intemperance and various other moral causes, no doubt they may have powerful influence on our prosperity but they afford no special explanation of a temporary wave of calamity.’ The issue of macroeconomic instability, then, could not be used as an argument for protection, for instance, since the cause fell on all countries indifferently as a natural state of affairs. To my knowledge, no one has adequately explored the hypothesis that the English retained their allegiance to free trade long after the Continent did because they, unlike the French or Germans, persisted in seeing economic relations grounded in a physical (and not physiological) analogy.

“Throughout his life, Jevons subscribed to the principle that macroeconomic fluctuations were of natural origins, but he encountered great difficulty in fleshing out the theory. His first article on the subject in 1875 tried to establish that English grain prices from 1254 to 1400 cycled with a period of 11 years. Because astronomers at that time believed that sunspot activity also rose and fell in cycles of 11.1 years, he asserted that the coincidence of periodicities implied that observed price fluctuations were caused by exogenous shocks. Of course, this was a very flimsy argument, as Jevons was well aware: he could not cite sunspot data contemporaneous with his fourteenth-century price data. Objections that would daunt the less resolute were not sufficient to restrain him: ‘I am aware that speculations of this kind may seem somewhat far-fetched and finely wrought; but financial collapses have occurred with such approach to regularity in the last fifty years, that either this or some other explanation is needed.’

“What was needed was some connection between the existing sunspot data-the Wolf Zurich relative sunspot numbers, beginning in 1749—and some contemporaneous indicator of economic activity. Jevons openly admitted that he had attempted to find a regular periodicity in the prices of European grains in the eighteenth and nineteenth centuries, but the search had failed. His next tactic was to assert the existence of a very stable 11-year period between English credit crises, and to suggest that the equality of periodicity with that of the sunspots was sufficient evidence to infer causality. This argument hinged crucially upon the claim that there was a clockwork regularity in the appearance of crises in England; and it was to this thesis that Jevons committed much intellectual effort. He produced one list of the dates of credit crises in 1877-1878, but then received the unpleasant surprise that astronomers had repudiated their earlier estimate of the periodicity of the sunspot cycle, revising the estimate to read 10.45 years. Again Jevons was not to be frustrated in his quest. He simply redefined a few of the dates of his ‘crises’ so that the average interval became equal to 10.5 years. His final list of crisis dates (with those Jevons indicated as doubtful in italics) were: 1701, 1711, 1731-1732, 1742, 1752, 1763, 1772-1773, 1783, 1793, 1804-1805, 1815, 1825, 1836-1839, 1847, 1857, 1866, and 1878.

“At this point, Jevons became the butt of some ridicule: one example was a satirical statistical study showing that the periodicity of winning Oxbridge teams in collegiate boat races was the same as that of sunspots. Other more serious challengers pointed out that Jevons’s conception of crises, as revealed in his choice of dates, was so vague as to admit of any and all interpretations. He responded by maintaining that he was simply proposing the following working hypothesis: ‘A wave of increased solar radiations favorably affects the meteorology of the tropical regions, so as to produce a succession of good crops in India, China, and other tropical and semi-tropical countries. After several years of prosperity the 6 or 800 millions of inhabitants buy our manufactures in unusual quantities; good trade in Lancashire and Yorkshire leads the manufacturers to push their existing means of production to the utmost and then to begin building new mills and factories. While a mania of active industry is thus set going in Western Europe, the solar radiation is slowly waning, so that just about the time when our manufacturers are prepared to turn out a greatly increased supply of goods, famines in India and China suddenly cut off the demand.’

“In his published work, Jevons also stressed that it was the long credits given in the Eastern trade that provided a transmission mechanism for the financial credit crises. The explanation was actually much more popular than we today might think, because it resonated with an ethos of the "white man’s burden" prevalent in the popular English culture of the 1880s and 1890s. Jevons capped this narrative in 1879 by publishing a series of wheat prices from Delhi, 1763-1834, which he claimed displayed the sought-after periodicity and corresponded to his chronology of crisis dates. From 1879 to his death in 1882 he published nothing further on the subject, but his correspondence reveals that he persisted in his defense and employment of his sunspot theory in discussions of macroeconomic fluctuations.”


[ pp. 150-151, SCIENCE, RATIONALITY, AND NEOCLASSICAL ECONOMICS, L.D. Keita; Delaware, 1992.]

“The bulk of this text was taken up with examining the claims of neoclassical economic theory to scientific status. Given contemporary views on the nature of scientific theory, I examined neoclassical economic theory in terms of both its historical and contemporary phases. I demonstrated that the cardinal theory of utility that formed the foundation for early neoclassical theory foundered on account of its inability to measure utility in any acceptable scientific way. Its substitute, the ordinal theory of utility, was shown to be equally unacceptable. The scientific pretensions of ordinal utility theory and its correlate, revealed preference theory, were shown compromised by the normative structure of the foundational postulate of rationality. The unscientific nature of ordinal utility theory was further shown to be reinforced by the insulating role played by the ceteris paribus proviso.

“This general critique was extended not only to the neoclassical theory of individual agent choice but also to general equilibrium theory and positive neoclassical welfare economic theory. Given the general dissatisfaction with neoclassical theory, a number of alternative theories have been proposed, but the problem with the latter is that, with few exceptions, they are founded on the premise that an objective science of economics is still possible despite its present failings. I pointed out the shortcomings of those theories and argued that on account of the nature of human decision making, no analysis of it could be scientific in the way in which the natural sciences are scientific. Mental states that must be invoked to explain behavior are just not subject to empirical analysis. The attempts by theorists to establish explanatory theories by appeal to heuristic concepts such as rationality were shown to be unsuccessful. The point is that ‘rationality’ plays a normative role similar to that of ‘goodness’ in ethical theory.

“The sociologist can indeed record the behavior of individuals in terms of cultural norms of ‘goodness,’ ‘badness,’ ‘deviancy,’ and so on, but he or she must recognize that theories of behavior founded on such concepts are necessarily normative. Similarly, the neoclassical theorist who embraces a particular notion of rationality and grounds his or her theories on such a notion is certainly formulating a normative theory. My analysis showed that the neoclassical theorist of economic behavior is confronted with the dilemma of restricting his or her analysis to a case-by-case taxonomy of individual agent choice, given the inaccessibility to mental states, or grounding his or her explanatory theories on the normative heuristic of rational choice. Neither alternative yields scientific results.”


Here Nobel Prize-winning economist Milton Friedman demonstrates his duplicity in an interview:

Ravaioli: But there are many other environmental problems…

Nobel Laureate Friedman: Of course. Take oil, for example. Everyone says it’s a limited resource: physically it may be, but economically we don’t know. Economically there is more oil today than there was a hundred years ago. When it was still under the ground and no one knew it was there, it wasn’t economically available. When resources are really limited prices go up, but the price of oil has gone down and down. Suppose oil became scarce: the price would go up, and people would start using other energy sources. In a proper price system the market can take care of the problem.

Ravaioli: But we know that it takes millions of years to create an oil well, and we can’t reproduce it. Relying on oil means living on our capital and not on the interest, which would be the sensible course. Don’t you agree?

Nobel Laureate Friedman: If we were living on the capital, the market price would go up. The price of truly limited resources will rise over time. The price of oil has not been rising, so we’re not living on the capital. When that is no longer true, the price system will give a signal and the price of oil will go up. As always happens with a truly limited resource.

Ravaioli: Of course the discovery of new oil wells has given the illusion of unlimited oil …

Nobel Laureate Friedman: Why an illusion?

Ravaioli: Because we know it’s a limited resource.

Nobel Laureate Friedman: Excuse me, it’s not limited from an economic point of view. You have to separate the economic from the physical point of view. Many of the mistakes people make come from this. Like the stupid projections of the Club of Rome: they used a purely physical approach, without taking prices into account. There are many different sources of energy, some of which are too expensive to be exploited now. But if oil becomes scarce they will be exploited. But the market, which is fortunately capable of registering and using widely scattered knowledge and information from people all over the world, will take account of those changes. [ p. 33, ECONOMISTS AND THE ENVIRONMENT, Carla Ravaioli; Zed, 1995]

(In fact, none of the Club of Rome’s predictions has failed. Economists like Friedman routinely lie to further their global political agenda.)

 

 

THE MARKET SYSTEM IS NOT “EFFICIENT”

There is an assumption in economics that the market system handles resource allocation in an efficient manner unless proven otherwise.
Thomas H. Tietenberg

The infrastructure of suburbia can be described as the greatest misallocation of resources in the history of the world.
J.H. Kunstler


When I use the term “market system,” it is not just the price mechanism but the entire system of regulation, qualification, credentials, reputations and clearing that surrounds that mechanism and makes it operate in a social context.

When economists claim the market is “efficient,” they actually mean “the efficient distribution of benefits” —NOT “the efficient use of materials.” An “efficient” market is a “Pareto optimal” market:

“The sole moral judgment an economist is supposed to be able to make is a wholly uncontroversial one: if every person is made better off by some change, the change (which is then called ‘Pareto optimal’) should take place. Even philosophers like John Rawls have adopted the notion of Pareto optimality… ” —Donald N. McCloskey

All economic models assume that human brains contain an unspecified and undiscovered mathematical device which maximizes utility (i.e., solve Bayes’ equations). This argument is nothing but “politics in disguise because” it’s true in all cases:

“Those who believe society can best be understood as a series of markets begin by positing a rational, calculating individual whose goal is to maximize ‘utility.’ This premise says everything and nothing, since it is true by definition in all cases. But it is a key aspect of the market model, since it is the behavioral part of the logical argument that whatever the market decides must be optimal.”—Robert Kuttner, EVERYTHING FOR SALE

Decision-makers are misled by economists into supporting their belief in Pareto optimality:

“The potential Pareto improvement criterion and other measures of economic efficiency do not pass the test of consistency and coherence within economic theory, nor do such measures accord with what public decision makers seek in policy advice from economists. Such efficiency measures are, nonetheless, durable components of the ideology of economics.” Daniel W. Bromley

Biologists tell us that “Pareto optimality” cannot occur in the real world because people are not mathematical utility maximizers:

“[Social science] approaches assume that unbounded rationality is possible and that the mind is a general-purpose computer that can figure out, in any situation, what will maximize a given quantity over the long term (whether utility or children). Indeed, the concept of ‘learning’ within the Standard Social Science Model itself tacitly invokes unbounded rationality, in that learning is the tendency of the general-purpose, equipotential mind to grow—by an unspecified and undiscovered computational means—whatever functional information-processing abilities it needs to serve its purposes, given time and experience in the task environment. [However,] neither human engineers nor evolution can build a computational device that exhibits these forms of unbounded rationality, because such architectures are impossible, even in principle. Although organisms sometimes appear to be pursuing fitness on behalf of their genes, in reality they are executing the evolved circuit logic built into their neural programs, whether this corresponds to current fitness maximization or not. Organisms are adaptation executers, not fitness pursuers. Mapping the computational architecture of the mechanisms will give a precise theory of behavior, while relying on predictions derived from fitness maximization will give a very impoverished and unreliable set of predictions about behavioral dynamics.” —John Toby and Leda Cosmides

Even economists tell us that people are not mathematical utility maximizers!

“Subjective expected utility (SEU) theory lies at the foundation of most contemporary economics. In the probabilistic version of SEU theory, Bayes’s rule prescribes how people should take account of new information and how they should respond to incomplete information. But empirical studies find that decision makers often overreact to new information, in violation of Bayes’s rule.”—DECISION MAKING AND PROBLEM SOLVING, Nobel winner Herbert A. Simon

It is axiomatic that if humans cannot maximize, then the market system is not inherently better than any other system of resource distribution and therefore, must be judged by some other metric.

The above observation is so important that I am going to repeat it:

It is axiomatic that if humans cannot maximize, then the market system is not inherently better than any other system of resource distribution and therefore, must be judged by some other metric.

What about energy and materials efficiency? Is the “market system” materials and energy efficient?

Our present method of distributing goods and services works something like this:

• Our government loans money to banks, so bankers can operate businesses (which require buildings, computers, furniture, lights, air conditioning, employees, commuting, etc.)

• The bankers then lend money to other businesses, like restaurants, real estate developers, etc. (which also require buildings, computers, commuters, advertising, accountants, etc.)

• So the employees of these restaurants, real estate developers, etc. can buy a car and drive to the store (with even more buildings, computers, commuters, etc.)

Just to buy a loaf of bread!

The “market system” is the most-inefficient distribution system in history!

Why not simply have government pay someone to pick up that loaf of bread at the bakery and deliver it to the consumer? This form of distribution would eliminate the banks, most of the other businesses, and all the stores. Most Americans would no longer need a car to commute to work or run to the store. However, some private businesses that provide critical services would still be operated, but at our government’s direction.

We could use the same energy efficient method of distribution for everything that Americans biologically “need.” Shoppers would order provisions online, in the same way that Amazon or Netflix works now, and then their orders would be delivered the next day. And a medical care caravan could regularly drive through neighborhoods, filling teeth, giving checkups, and so on.

Close the Economics Department (click to open)

“[The Chicago School of Economics is] a great center of contemporary scholasticism. The economists working there and produced by it are as important to the stagnation of useful thought as the Schoolmen of the University of Paris were at the height of the Middle Ages… Like that of the Paris scholastics, their mastery of highly complex rhetorical details obscures a great void at the centre of their argument… A large number of America’s economic problems could be solved by shutting down the Chicago School of Economics… The purpose of closure would be simply to disentangle a tendentious ideology from its unassailable position within contemporary power structures. The same sort of liberating shock treatment was applied to European civilization in 1723 when the Society of Jesus (Jesuits) was disbanded. The effect was to set free the ideas of the Enlightenment.”—John Ralston Saul, 1994


“Economists have become a plague as dangerous as rabbits, prickly pear or cane toads. Economists have become the cultural cane toads of Canberra, oozing over the landscape and endangering myriad indigenous species. Not only the economy but also mental health would be greatly improved if we could lift the fog of obfuscation on things economic. The first step is to take economists from their pedestal and to see them as the curiosities they are. The first step to reducing their power is to reduce their legitimacy. How is this to be achieved? First, economists’ outpourings should, as a matter of principle, be met with laughter, derision, benign paternalism. They should cease to be employed as media commentators. In the long term they should cease to be hired. Let them be pensioned off and die out. Extinction is a worthy end for a profession whose brief is rotten to the core.”—Dr. Evan Jones, Economics Department, University of Sydney, 1991

 

 

WILL DECADES OF FALLING NET ENERGY FORCE DECADES OF WARS?

Oil has literally made foreign and security policy for decades. Just since the turn of this century, it has provoked the division of the Middle East after World War I; aroused Germany and Japan to extend their tentacles beyond their borders; the Arab Oil Embargo; Iran versus Iraq; the Gulf War. This is all clear.
Secretary of Energy, Bill Richardson, December 9, 1999

War is a male reproductive strategy. All that is needed for the strategy to evolve, is that aggressors fight and win more often than they lose.
Michael P. Ghiglieri


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Decades of declining available energy will force a country to reorganize politically, take energy from another, or collapse into anarchy. Some countries will use violence to increase their “fraction” of the remaining energy—which will decrease another’s fraction. If the most-powerful countries begin to take energy from each other, it will inevitably lead to a new round of world wars over resources!

Resource wars killed over 100 million people in the last century. A recent report by UNITED STATES JOINT FORCES COMMAND put it this way:

“A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is difficult to predict. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest.”[ http://tinyurl.com/32wrwjd ]

Is a new century of “ruthless conquest” inevitable?

DeathRocket

The alternative to a new round of World Wars, which will leave nothing but radioactive rubble for our children, is “energy efficiency.” However, this is not the energy efficiency we commonly think of; this is a new kind of energy efficiency.

THE NEW KIND OF ENERGY EFFICIENCY

Wherever men hold unequal power in society, they will strive to maintain it. They will use whatever means are convenient to that end and will seek to justify them by the most plausible arguments they are able to devise.
Reinhold Neibuhr

Laissez-faire was planned; planning was not.
Karl Polanyi


Here is the logic, which leads us to the new kind of energy efficiency, step by step:

• Since it is physically impossible, thus, economically impossible, to increase global net energy production, the only way to avoid a new series of world wars is to reduce energy demand permanently.

• The only way to reduce our energy demand permanently is to increase the energy efficiency of our existing social system while preventing new demands for energy.

• The only way to prevent new demands for energy is to abandon the “market system” as a means of social control while reducing population numbers.

• Instead of the market system, we must use democratic politics to apply modern science and engineering directly to the problems of human health and happiness. This is what I propose in AMERICA 2.0.

As far as I know, my proposal is the ONLY one that has the potential to avoid a new series of world wars over resources.

YOUR TACTICS

“The phrase consent of the governed has been turned into a cruel joke. There is no way to vote against the interests of Goldman Sachs. Civil disobedience is the only tool we have left.”
—Chris Hedges, THIS IS WHAT RESISTANCE LOOKS LIKE

“You don’t communicate with anyone purely on the rational facts or ethics of an issue… It is only when the other party is concerned or feels threatened that he will listen—in the arena of action, a threat or a crisis becomes almost a precondition to communication… No one can negotiate without the power to compel negotiation… To attempt to operate on a good-will basis rather than on a power basis would be to attempt something that the world has not yet experienced.”
—Saul Alinsky, RULES FOR RADICALS

“The big corporations, our clients, are scared shitless of the environmental movement. They sense that there’s a majority out there and that the emotions are all on the other side—if they can be heard. They think the politicians are going to yield to the emotions. I think the corporations are wrong about that. I think the companies will have to give in only at insignificant levels. Because the companies are too strong, they’re the establishment. The environmentalists are going to have to be like the mob in the square in Romania before they prevail.”
—William Greider, WHO WILL TELL THE PEOPLE


If you were born after 1960, you will probably die of violence, starvation or contagious disease. Although it’s news to you, your generation is challenged with a technically-insoluble problem—a political problem—which will likely kill five out of six worldwide—or perhaps all. In order do avoid the worst, you must move from a capitalistic form of government, which requires endless resource depletion, to a democratic form, which does not.

Your tactics required must be twofold:

• Its virtually impossible to teach physical science to economists because it threatens their social status, but the inverse is not true. Its easy to teach economic theory to physical scientists, see: Economic Theory For Scientists and Engineers (above). Therefore, the first step should be to teach economic theory to scientists and engineers, so they can explain to the rich people who run this country why capitalism must be abandoned in favor of democracy.

• The second step convinces the rich that its in their best interest to make the change. One such tactic would be to fill the streets of D.C. with activists, “like the mob in the square in Romania,” until the city is grid locked. Activists should just stay there until the rich concede.

It’s that simple. It’s that impossible.


The Easter Islanders, aware that they were almost completely isolated from the rest of the world, must surely have realized that their very existence depended on the limited resources of a small island. After all, it was small enough for them to walk round the entire island in a day or so and see for themselves what was happening to the forests. Yet they were unable to devise a system that allowed them to find the right balance with their environment.
—Clive Ponting

Why didn’t they look around, realize what they were doing, and stop before it was too late? What were they thinking when they cut down the last palm tree? 
—Jared Diamond, EASTER’S END

What were the Easter Islanders thinking? What are you thinking right now?


 

me

Free, Color, Scaleable OccupyWallStreet Posters!
http://www.jayhanson.org/ows8x11.pdf (filesize 4 megs)
http://www.jayhanson.org/ows11x17.pdf (filesize 8 megs)

Links to Slide Shows

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Limits to Growth: Oil

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Limits to Growth: America

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Politics

Money

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Corporations

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Behavior One

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Prehistoric Economics

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Perpetual Motion

Is the United States drifting toward “war socialism”? http://www.energybulletin.net/print/49369

Recent audio interview with Jay Hanson, excellent! (.mp3): rr-jhanson-16kbps

“In the 1990s Jay Hanson’s web site predicted with uncanny accuracy key trends of the early 21st century with respect to energy, the environment and geopolitics. What did he learn that most of us still don’t know, and what does he foresee ahead of us? This program reviews the history and motivation behind Jay’s work. With his background in computer programming, he is able to keenly parse a great deal of information into a logical framework, combining analyses of history, politics, biology, energy and economics into a generally horrific view of the future. Jay explains how he believes that until we face the causes of the crises upon us we will not overcome them. However, understanding is seriously hindered by self-deception and political expediency. As a contrast to the horrors of war and coercion he fears are upon us, he uses his knowledge of ecology and energy to envision a sustainable society —the difficulty he has is seeing a path to get there.”

Combined Search of dieoff.org and jayhanson.us