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Refuting Economics
 
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Refuting Economics

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Joseph
 Joseph
(@joe)
Estimable Member

We're all aware on this forum how much literal junk and pseudoscience and lies there are in most fields of economics. I think it would be useful for us and others to have a place where we can collect "debunking" resources and facts. I'm most familiar with Neoclassical Economics so I'll start us off with some stuff.

 

1. Supply and Demand alone are non-falsifiable and therefor not science
This is not too controversial even within neoclassical economics. Here's the basic rundown. Supply and Demand theory states that you can determine price and quantity using only a supply curve and a demand curve. A supply curve assumes there is a relationship between the price of a commodity and the quantity of a commodity, and the same goes for demand. The simplest relationship is linear. (no slope means there is no relationship, no intercept means all the lines meet at 0,0). This means each curve has 2 coefficients at least. At any time we can only ever observe a single price and quantity, we are left with 4 unknowns in our two equations--the slope of the supply curve, the intercept of the supply curve, the slope of the demand curve, and the intercept of the demand curve. This is thus not falsifiable. Observing another price-quantity pair would mean that one of the curves has shifted and thus would represent entirely different coefficients. This is why you never see, in ANY published study, the equation for actual supply or demand curves. It's always elasticity or some such.

 

2. Revealed Preferences can NOT save Supply and Demand by providing other measurables
Point 1 was known to neoclassical economists for some time (if memory serves, even the Austrians point out it's nonsense). In response, neoclassical economics came up with the idea of modelling the market as being made of individuals, each with their own preferences, which would then compose either side of the market and thus provide other metrics which could produce the supply and demand curves. There are 3 main problems with this. I'll detail the first now and the other two in Point 3 and Point 4.

These preferences are modeled in neoclassical economics as being those of rational utility-maximizing individuals. This means for any given set of commodities, an individual's preferences are complete and transitive. Neoclassical econ was initially told these preferences were not observable, but a clever neoclassical economist came up with a way to indirectly observe them known as "revealed preferences". You get some actual people, give them a budget, and have then choose how to spend it on some commodities you laid out. then you change the prices or maybe the amount of money they have to spend. After doing this enough times, you can see their underlying preferences be revealed thru their behavior. As neoclassical economics is often want to do, it rested on its laurels. It wasn't until the 90s that someone actually got around to testing revealed preferences in this way. Under incredibly ideal conditions (the test subjects were university students, they had unlimited time, and computer automatically calculating totals) it was found that the neoclassical theory of rational utility maximizers did NOT accurately describe test subject choices. When the strictness of rational utility maximization was relaxed, it was a better predictor of completely random choices. Source: https://doi.org/10.1111/j.1468-0297.1997.tb00056. x" target="_blank" rel="noopener">Sippel, R. (1997). AN EXPERIMENT ON THE PURE THEORY OF CONSUMER’S BEHAVIOUR*. The Economic Journal, 107(444), 1431–1444. doi:10.1111/j.1468-0297.1997.tb00056.x10.1111/j.1468-0297.1997.tb00056.x

 

3. Supply and Demand curves can NOT be saved by starting with rational individuals and adding up their individual demands to get a demand curve.
This one is a doozy. You'll learn the basics of this if you ever get a PhD in neoclassical economics. Back in the 1970s, neoclassical econ was trying desperately to build their entire theory on microeconomics, specifically the rational utility maximizer nonsense we just went over. it was known for a long time that, mathematically, you could make a demand curve for an individual that obeyed the "law of demand". ie you could start with a rational utility maximizer with a set of preferences and from there produce a curve that obeyed the rule that as price went up, the quantity demanded would go down. (now, obviously you'd never be able to do this in real life for reason 2 but roll with me here).

Neoclassical econ tried desperately to get this to work for the market demand curve as well. What many economics textbooks claim is that you get the market demand curve by simply "adding up" the individual demand curves. More textbooks however just gloss over it. This is false. You CAN NOT simply add up individual demand curves to get the market demand curve. This culminated in the Sonnenschein-Mantel-Debreu theorem, a proof which should have spelled the doom of neoclassical econ (this is a running theme). This proof showed that, starting with individuals who were rational utility maximizer, you could get ANY polynomial as a market demand curve. Basically any function could be a market demand curve. The impact is best summarised by Sonnenschein himself:

"...market demand functions need not satisfy in any way the classical restrictions which characterize consumer demand functions... The importance of the above results is clear: strong restrictions are needed in order to justify the hypothesis that a market demand function has the characteristics of a consumer demand function." - Sonnenschein, 1982 (Handbook of Mathematical Economics)

So economists began searching for such conditions. But it was all for naught. In the 1950s, an economist had already found them. Like always happens in neoclassical economics, a result which spells doom for the entire field is simply buried and ignored. Gorman, 1953 is a mathematically intensive work which aimed to do what SMD did decades later. Gorman determined that for a market demand curve to obey the law of demand, each of the individual's Engel curves must be straight lines, and all of the Engel curves must be parallel to eachother.

The first condition states that to get even a continuously downward sloping demand curve using neoclassical economic foundations, you can't have the commodity be a luxury or a necessity. you must always consume the same proportion of it whether you are Jeff Bexos or a poor Malaysian plantation slave. If you earn $10 per week and spend $1 on pizza, if you would then earn $100,000 a week, you'd spend $10,000 on pizza. Lunacy. So any commodity like cigarettes, food, water, electricity, etc. just straight up can not be modeled.

But what this also states is that there can only be a single commodity in the market. If you consume two commodities always in the same proportion, they are actually a single commodity. When you buy mac and cheese in a box, you are always buying the same proportion of noodles and cheese mix and cardboard. When you buy the latest model of iPhone you are buying 1 commodity, not each individual one.

The second condition states that all consumers must have identical preferences, that's what parallel Engel curves means. But Gorman forgets 1 thing. He's disproved himself by contradiction. Engel curves ALL MUST start at 0,0. For all of them to pass thru the same point and be parallel, that means all Engel curves must be the same line. This means that mathematically there is only a single consumer. Consumers can only be differentiated using preferences in the micro foundations.

So mathematically, in 1953, it was shown that to make a market demand curve obey the law of demand and not simply be any polynomial imaginable, there an only be 1 consumer and 1 commodity. ie, there can't be a market.

 

4. Supply in neoclassical economics is a calculus error. no, seriously.

Quote
Topic starter Posted : 22/11/2022 12:52 pm
Joseph
 Joseph
(@joe)
Estimable Member

Accidentally posted and ran out of time to edit.

4. Supply in Neoclassical Economics is a calculus error. No, seriously.
This one is fun and simple. To make a supply curve, neoclassical econ needs it to be independent of the demand curve. The way they do this is by lying.

They say that each of the infinitely many suppliers (this should already be a nonstarter but whatever at this point, right?) is so small that each sees only a single point on the demand curve. Thus, each faces no change in demand as they produce more or less. You see what they did? They took the derivative of a downward sloping line and said it was 0. For everywhere. On every line.

ReplyQuote
Topic starter Posted : 22/11/2022 1:07 pm
Joseph
 Joseph
(@joe)
Estimable Member
Posted by: @joe

So mathematically, in 1953, it was shown that to make a market demand curve obey the law of demand and not simply be any polynomial imaginable, there an only be 1 consumer and 1 commodity. ie, there can't be a market.

They also do some fun mental gymnastics to justify this.

Gorman, in his own result, saying this nonsense is actually intuitively reasonable.

"The necessary and sufficient condition quoted above is intuitively reasonable. It says, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given" - Gorman, 1953 page 64

Mas-Colell, Whinston et al. 1995 is my personal favorite tho. They at least admit that the SMD conditions can allow a market demand curve to have any shape, but provide a way around it.

"Let us now hypothesize that there is a process, a benevolent central authority perhaps, that, for any given prices p and aggregate wealth function w, redistributes wealth in order to maximize social welfare" - Mas-Colell, Whinston et al. 1995, page 117

lol what? Neoclassical econ is literally like "yeah bro, we can make a market demand function. ok so first you assume God in heaven"

ReplyQuote
Topic starter Posted : 22/11/2022 1:14 pm
Joseph
 Joseph
(@joe)
Estimable Member

Here's a nice excerpt and walkthru of a Samuelson and Nordhaus textbook if you're looking for laugh.

 Keen-Debunking-Economics-Page-62.png
ReplyQuote
Topic starter Posted : 22/11/2022 1:18 pm
Tomas Härdin
 Tomas Härdin
(@thardin)
Estimable Member

Another amusing thing with this supply curve rubbish is that neoclassicals claim that it slopes upward. In other words that the marginal cost of a commodity increases the more of them are made. That this is nonsense is something that even a layman can understand. Neoclassicals will try to explain this by claiming that the curve moves in that case, at which point one may wonder what the point of the curve is at all if it can't handle such basic economic phenomenona as economics of scale.

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Posted : 22/11/2022 5:12 pm
Joseph
 Joseph
(@joe)
Estimable Member

@thardin that's a great point!
i think i remember reading something similar. there was a study where they asked a bunch of business administrators and managers what they're marginal cost curves were and about none of them said they were what neoclassical econ predicts.

if i find it i'll post it here.

ReplyQuote
Topic starter Posted : 22/11/2022 5:39 pm
Joseph
 Joseph
(@joe)
Estimable Member

@thardin @joe

found it!
https://www.jstor.org/stable/1812530

 

ReplyQuote
Topic starter Posted : 22/11/2022 6:06 pm
Tomas Härdin
 Tomas Härdin
(@thardin)
Estimable Member

@joe I see marginalism runs on the same logic as the bestest of races, da Orkz: it works so long as you fink it works

ReplyQuote
Posted : 22/11/2022 7:45 pm
Joseph
 Joseph
(@joe)
Estimable Member

@thardin lmao🤣

ReplyQuote
Topic starter Posted : 22/11/2022 9:09 pm
Brandon
 Brandon
(@tbrandon)
Active Member

The Cobb-Douglas production function only seems to fit output data well because the wage share tends to be relatively constant, making its apparent empirical strength an artifact, as Shaikh demonstrated almost 50 years ago. It's just curve-fitting. Mainstream macroeconomics is broken, surprise surprise. 

 

ReplyQuote
Posted : 29/12/2022 4:09 am
Joseph
 Joseph
(@joe)
Estimable Member

@tbrandon woah! nice addition. i remember hearing so much about the genius of cobb-douglas during my econ undergrad and being confused since it just seemed like a function with 4 unknowns.

ReplyQuote
Topic starter Posted : 06/01/2023 12:51 pm
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