February 17, 2018

Heterodoxy ― an axiomatic failure just like Orthodoxy

Comment on Christian Arnsperger/Yanis Varoufakis on ‘The first axiom of neoclassical economics: methodological individualism’

Blog-Reference and Blog-Reference

After 200+ years, economists still do not have the true theory/model. The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science and later on with this very specific guideline: “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)

This translates into the neo-Walrasian axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

Of course, economists did not stick slavishly to HC1/HC5 but varied the one or the other axiom. This, though, never to the point of abandoning the neoclassical paradigm completely. Arrow’s definition therefore covers General Equilibrium Theory, Marshallian partial analysis, Behavioral Economics, DSGE, RBC, New Keynesianism, Agent Based Models, and a whole grab bag of verbalized/common sense/ad hoc/special purpose models. In effect, everybody starts from his own do-it-yourself set of premises and the inevitable result is a heap of inconsistent and incoherent models with a lost common core.

While the failure of economics is beyond reasonable doubt, the representative economist still suffers from the delusion that what he does is science. It is nothing but cargo cult science which Feynman described as: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.”

Christian Arnsperger/Yanis Varoufakis see the crucial methodological blunder in methodological individualism: “So, the first feature of the ‘body of theory’ we think of as neoclassical is its methodological individualism: the idea that socio-economic explanation must be sought at the level of the individual agent.”

This is accurate but a bit shallow. While methodological individualism is indeed false in all dimensions, the problem goes deeper. And here is where Heterodoxy’s own failure comes into view.

The common understanding of neoclassical models is that they are behavioral. The representative economist traditionally takes Human Nature/motives/behavior/action, i.e. a mixture of folk psychology and folk sociology, as a starting point and then tries to explain the behavior of the economy as a whole. The crucial methodological defect of the behavioral approach is that NO way leads from the explanation of Human Nature/motives/ behavior/action to the explanation of how the economic system works. All behavioral/ microfounded approaches crash against the methodological wall that is known as Fallacy of Composition.

Economics does not conform to Aristotle’s general definition of science: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” The neoclassical premises = microfoundations have NEVER been certain/true/primary. This is why orthodox economics is an axiomatic failure.

The only reason why Orthodoxy is still around is that Heterodoxy has failed to develop a suitable alternative: “... we may say that ... the omnipresence of a certain point of view is not a sign of excellence or an indication that the truth or part of the truth has at last been found. It is, rather, the indication of a failure of reason to find suitable alternatives which might be used to transcend an accidental intermediate stage of our knowledge.” (Feyerabend)#1

Heterodoxy habitually criticizes/rejects methodological individualism but shares the underlying methodological tenet that economics is a social science. It is not. Economics is a systems science. The subject matter of economics is not human behavior but the behavior of the economic system.#2

So, there is NO use to change the one or the other neo-Walrasian axiom and to keep the rest. A paradigm shift is indispensable, and this means that the neoclassical approach has to go out of the window for good. Economics has to move from behavioral axioms/ microfoundations to systemic axioms/macrofoundations. Keynes tried but failed.#3

The state of economics is as follows: (i) all neoclassical/microfoundations approaches are axiomatically dead, (ii) all Keynesian approaches are defective with regard to the definition of macroeconomic profit/income, (iii) neither Orthodoxy nor Heterodoxy has consistent axiomatic foundations, (iv) if it isn’t macro-axiomatized it isn’t economics#4, (v) in the scientifically strict sense, economics is still at the level of a proto-science.

Heterodoxy has exhausted itself with repetitive critique of detail but never got to the point of wholesale and definitive refutation which is the hallmark of a paradigm shift: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug) and “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

In fact, this has always been too hard for traditional Heterodoxy and this is why it has to be buried in the same scientific graveyard as neoclassical economics and the Flat Earth Theory. *

Egmont Kakarot-Handtke


#1 The stupidity of Heterodoxy is the life insurance of Orthodoxy
#2 For details of the big picture see cross-references NOT a science of behavior
#3 For details of the big picture see cross-references Keynesianism
#4 The core of macroeconomic premises reads: (A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

* See Wikimedia


Related 'From false microfoundations to true macrofoundations' and 'Dilettantes at the end of the coal-pit' and 'Economics ― a doctor worse than the disease' and 'From Orthodoxy to Heterodoxy to Sysdoxy'. For details of the big picture see cross-references Axiomatization and cross-references Heterodoxy.

February 16, 2018

Ricardo and the invention of class war

Comment on Sandwichman on ‘No Other Way of Keeping Profits Up’

Blog-Reference and Blog-Reference on Feb 17

Ricardo asserted the seemingly obvious “There is no other way of keeping profits up, but by keeping wages down.” This assertion is pure common sense, plain and immediately convincing as “the sun goes up”. Needless to emphasize that both assertions are scientifically false.#1

By asserting an antagonism between wages and profits, Ricardo provided the economic underpinning for Marx’s sociological/political concept of class struggle or class war. In the following the proof is given that there is NO antagonism between wages and profits and that classes are an optical illusion.

The pure production-consumption economy is defined with this set of macro axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.#2

Under the conditions of market clearing X=O and budget balancing C=Yw in each period the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. It translates into W/P=R (2), i.e. the real wage is equal to the productivity. For the graphical representation see Wikimedia.#3

Monetary profit is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0 or Qm=−Sm, in other words, the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It says that profit/loss has NOTHING to do with labor time, wages, productivity, greed, monopoly, power etcetera but with the change of private and public debt.

In the pure production-consumption economy, labor gets the whole product according to (2), and profit for the business sector as a whole is zero because C=Yw. All changes in the system are reflected by the market clearing price. As a matter of principle, the pure production-consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined alone by the productivity.

Obviously, there is NO such thing as an antagonism of wages and profits in the elementary production-consumption economy. If the wage rate W goes up the market clearing price goes up according to (1) and the real wage remains unchanged according to (2).

This means, first of all, that Ricardo’s theory of profit and rent is proto-scientific garbage. This is fatal for Marx who built on Ricardo.

The business sector is now split into two identical firms and firm 1 is supposed to cut the wage rate W1 arbitrarily by half. From this follows that the market clearing price P declines if all other variables are unchanged. Firm 2 is affected because total income Yw falls and with it consumption expenditures C and the market clearing price P.

The reduction of the wage rate W1 increases the profit of firm 1 and produces a loss in firm 2. When we look alone at firm 1 we see what Smith, Mill, Ricardo, and Marx have seen before, to wit, wages down ― profit up. This fits the time-honored stereotype of wages and profits as antagonists.

The error/mistake/blunder of Ricardo et al. was to generalize what is true for a single firm and this is known as Fallacy of Composition.

If profit has been zero in the initial period because of budget balancing C=Yw then firm 2 makes a loss which is exactly equal to firm 1’s profit. Hence, the arbitrary wage rate cut of firm 1 does NOT increase the profit of the business sector as a whole but only REDISTRIBUTES profit/loss between the firms that constitute the business sector.

Seen from the perspective of a single firm, the antagonism of wages and profits is absolutely real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off to the disadvantage of firm 2 and the workers of firm 2 are better off to the disadvantage of the workers of firm 1 because at a lower market clearing price they absorb a bigger share of output O with their unaltered income. The situation of the business sector as a whole is unchanged and the same is true for the household sector as a whole. If there is exploitation it happens within the sectors. A partial wage rate change leads only to a redistribution of profits between the firms and of output between the workers. A global wage rate change leads under the condition of budget balancing and market clearing only to a price hike.

For the economy as a whole, the Ricardian antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. Because Ricardo’s profit theory is false Marx’s theory of class war is false. What looks like exploitation is, in fact, cross-over exploitation WITHIN the Marxian classes.

The myopic agents, workers and capitalists alike, are blind to these interdependencies and therefore prone to the Fallacy of Composition. This is excusable. But that economists suffer from the same delusions is inexcusable.

As One of the Old School put it in 1829 “That which bears the name of Political Economy, is now taught at your University, …, as a science equally true in its principles with Geometry. If it be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”#5

Egmont Kakarot-Handtke


#1 Ricardo, too, got profit theory wrong. Sad!
#2 For details see ‘Profit for Marxists
#3 Wikimedia, Pure Production-Consumption Economy


#4 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#5 The real problem with the economics Nobel

Related 'Profit and stupidity' and 'The abject failure of orthodox and heterodox distribution theory' and 'No exploitation, no classes' and 'Marx, the moron' and 'Your profit theory is false'. For details of the big picture see cross-references Profit.

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REPLY to Sandwichman on Feb 16

You say “Well, Egmont, you forget that if the owners of capital BELIEVE that profits are a subtraction from wages (and/or vice versa) and act accordingly it becomes a self-fulfilling prophecy.”

Obviously, you have never heard of the Invisible Hand. It does not matter what people believe they are doing. They think they follow their own interest but, in fact, promote the overall optimum optimorum. Self-delusion is the whole point of the free market system and the ultimate justification since Mandeville’s Private Vices = Public Benefits. Of course, this is economic storytelling and proto-scientific garbage.

Overall net-profits do NOT come into existence because people dream or hallucinate about them but ultimately because of the increase of private/public debt. This is the Invisible Hand. If the budget is balanced C=Yw there is NO overall profit, NO matter what capitalists believe or how they act. With regard to profit, there is NO self-fulfilling prophecy only the Iron-Objective-Eternal-Testable Profit Law.

My proof shows how the Invisible Hand works. What people believe is NOT AT ALL a matter of economics but of psychology and sociology.

Take notice that economics is NOT a science of Human Nature/motives/beliefs/ expectations/behavior/action but a system science. Economics has since 200+ years been on the wrong track and has produced nothing but folk psychology and folk sociology. Economics is a failed science because economists are incompetent scientists who suffer from the social science delusion.#1

The Profit Law consists of measurable variables. It is testable and it will be corroborated without exception in all countries with a scientific infrastructure without bothering one second about people’s silly beliefs.

#1 For details of the big picture see cross-references Failed/Fake scientists

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REPLY Sandwichman on Feb 16

You say “The ‘invisible hand’ is a lump of labor”

Obviously, you have not realized that your lump-of-labor (EXPLETIVE DELETED) has already been refuted. See Unemployment is the outcome of political economics.

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REPLY to Barkley Rosser on Feb 17

Scientific standards are well-defined: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

Because a theory must satisfy TWO criteria ― material AND formal consistency ― it is sufficient for a refutation to prove that it is EITHER materially OR formally inconsistent.

I have proven that Ricardo’s profit/distribution theory is formally inconsistent. More specifically, that Ricardo committed the Fallacy of Composition and the Humpty Dumpty Fallacy by defining total income as sum of wage income and profit.#1, #2 More specifically, the macroeconomic definition of total income as Y=W+P translates algebraically into 1=1/(1+P/W)+1/(1+W/P) and this translates verbally into Ricardo’s pivotal claim “… profits would be high or low in proportion as wages were low or high.” (Principles, p. 110) but because the premise is false Ricardo’s assertion is false.

By consequence, Ricardian economics is refuted. Now, the ball is in your field. If you do not agree with me ― and you obviously don’t ― you have to demonstrate where my logical error/mistake/blunder lies. Blah blah is NOT sufficient.

What you could alternatively do is to demonstrate that I am empirically wrong because from the axiomatically correct profit theory follows the general balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 while from Ricardo’s false profit theory follows the Post Keynesian balances equation (I−S)+(G−T)+(X−M)=0.

The experimentum crucis ― which of the two equations is empirically true? ― has never been performed for the simple reason that macroeconomics runs since Keynes blindly on the false profit theory and the false Post Keynesian balances equation.#3 MMT is the Smoking Gun proof.

But again, the ball is in your field. If you know in your profound academic erudition that there is an empirical study which has corroborated the Post Keynesian balances equation or refuted my balances equation it is your scientific duty to present it in the current discussion. Again, blah blah is NOT sufficient.

As One of the Old School said in 1829: “If it [economics] be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”


#1 Ricardo, too, got profit theory wrong. Sad!
#2 Profit, income, and the Humpty Dumpty Fallacy *
#3 How Keynes got macro wrong and Allais got it right

*

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REPLY to vertegaa@vcn.bc.ca on Feb 18

A theory must satisfy TWO criteria ― material AND formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing. This is known since 2000+ years: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)

So, the first problem to solve is the Starting Problem. J. S. Mill put it thus: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

Krugman, for one, is quite explicit about how he has solved the Starting Problem: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Krugman, of course, is an idiot. Maximization and equilibrium cannot serve as axioms because they are NOT certain, true, and primary. For various methodological reasons, given elsewhere#1, I propose to start with this core of macroeconomic and behavior-free axioms: (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X. *

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. All variables are measurable in principle. The set of premises is minimalistic, that is, Occam’s Razor has been applied and the set cannot be reduced further, only expanded. The set contains no nonentities like utility, constrained maximization, equilibrium, and no normative assertions.

You can NOT refute these axioms by doubting and nagging, only by replacing them with a superior set. Or, in Feynman’s words: “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

I am sure that you cannot do it, and nobody else, for that matter because you cannot have an axiom set for the most elementary production-consumption economy with less than three axioms. The set (A1)/(A3) replaces the neo-Walrasian set and the Keynesian set of foundational propositions.

You say: “because the ‘axioms’ you come up with are inherently insufficient to glean a systematic meaning, or purpose, from.” Yes, but the idea that some purpose must be put into the axioms indicates that you do not yet fully understand what axiomatization is all about.

You say: “You ‘axiomatically’ split total profit Q into Qm (monetary profit) and Qn (non-monetary profit). If the system allows the latter to become part of the former and/or vice-versa, however, then not only are these not ‘entirely different kinds of profits’ as you claim but you’ll have to show a common numeraire as well, or the premise and hence your theory of profit is false, …”

Perhaps the terminology is a bit unfamiliar. Both monetary Qm and nonmonetary profit Qn are nominal magnitudes, e.g. Dollar, Yen, Euro etc., but monetary profit can be read off a bank account or touched in the cash box, non-monetary profit is the not-yet-realized increase of an asset’s value or what is commonly called a paper profit.#2

You say “Come to think of it, what is your theory of money? Every factor/element in your identities numerated in the latter needs it!”

True, accordingly, money has already been treated extensively elsewhere.#3

You say “what makes you now think that such a static depiction has merit in a known to be dynamically operating economy.”

The ‘general balances equation’ is not static and has nothing to do with equilibrium. It is more like reading a speedometer in a moving car.#4


#1 For details of the big picture see cross-references Axiomatization

*

February 14, 2018

Ricardo, too, got profit theory wrong. Sad!

Comment on Sandwichman on ‘No Other Way of Keeping Profits Up’

Blog-Reference and Blog-Reference

In his letter of 1829 To the Heads of the University of Oxford, One of the Old School asked: “ARE THE PRINCIPLES OF POLITICAL ECONOMY WHICH GOVERNMENT IS ACTING ON TRUE OR FALSE?”#1

He got the following answer in the Westminster Review.#2

“The first of the principles which ‘the old school’ think so erroneous, is the well-known doctrine of Mr. Ricardo, that, putting rent out of the question, the price of every commodity consists wholly of wages and profits.”

Ricardo is known for having asserted: “… profits would be high or low in proportion as wages were low or high.” (1981, p. 110) However, things are not as straightforward as they seem.

The WR now goes on to filibuster: “In this nomenclature low and high have no reference to amount; they indicate only proportion. If a commodity should at one time sell for ten shillings, of which the labourer received nine, and should afterwards sell for twenty, of which the labourer received fifteen, this, according to Mr. Ricardo’s nomenclature, would be a fall of the labourer’s wages. Though he would receive a larger amount, he would have a smaller proportion. And proportion is all that Mr. Ricardo considers.”

“This strange use of words, like every other deviation from ordinary language, has produced much obscurity. It has some times led even such men as Mr. Ricardo and Mr. M'Culloch into inconsistency. Our readers may imagine how it has confused Mr. Blackwood’s correspondent. He has not the least glimmering of the meaning of the writers whom he attacks, but goes on heaping abuse on economists for propositions in which they understand by the word low wages a low proportion, while he supposes them to mean a small amount.”

“But he [Ricardo] is not consistent. When he says, that ‘whatever raises the Wages of labour, lowers the Profits of stock,’ he considers Wages as a proportion. When he says that ‘high Wages encourage population,’ he considers wages as an amount. Even Mr. M'Culloch, who has clearly explained the ambiguity, has not escaped it. He has even suffered it to affect his reasonings. In his valuable essay ‘On the rate of wages,’ he admits that ‘when Wages are high the Capitalist has to pay a larger share of the produce of industry to his labourers,’ An admission utterly inconsistent with his general use of the word, as expressing the amount of what the labourer receives, which, as he has himself observed, may increase while his proportion diminishes.”

The profit theory has not improved since 1829. As Mirowski put it “... one of the most convoluted and muddled areas in economic theory: the theory of profit.”

The error/mistake/blunder of Ricardo’s profit theory is that it is a generalization of what can be observed at the microeconomic level, that is, it is a Fallacy of Composition. The profit for the economy as a whole has to be derived from macroeconomic axioms.#3

Monetary profit for the economy as a whole is defined as Qm≡C−Yw (C consumption expenditures, Yw wage income) and monetary saving as Sm≡Yw−C. It always holds Qm+Sm=0, or Qm=−Sm, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing C=Yw total monetary profit is zero.

Macroeconomic profit depends in the most elementary case alone on deficit spending, that is, on the change of private or public debt. It does NOT depend on labor time, or wages, or productivity, or monopoly power, or greedy managers. More specifically:

  • The business sector’s revenues can only be greater than costs if, in the simplest of all possible cases, consumption expenditures are greater than wage income.
  • Macroeconomic profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior, nor on markup setting, nor on risk-taking.
  • In order that profit comes into existence for the first time in the pure production-consumption economy, the household sector must run a deficit at least in one period. This presupposes the existence of a credit creating entity.
  • Profit/loss is, in the most elementary case, determined by the increase and decrease of household sector’s debt.
  • Monopoly power/rent-seeking is irrelevant for macroeconomic profit and affects only the DISTRIBUTION of total profit BETWEEN firms.
  • There is no relation at all between profit, capital, marginal or average productivity.
  • Innovation and efficiency are irrelevant for the profit of the business sector as a whole.
  • Profit is a factor-independent residual and qualitatively different from wage income (difference of flows vs flow). Therefore, it is an elementary mistake to maintain that total income is the sum of wages and profits.#4

Microfounded profit theory suffers from three methodological blunders: the Fallacy of Insufficient Abstraction, the Fallacy of Composition, and the Humpty Dumpty Fallacy. The Principles of Political Economy were false in 1829 and are false until this very day.

Egmont Kakarot-Handtke


#1 Blackwood’s Magazine (courtesy EconoSpeak)

#2 Westminster Review
#3 The profit theory is false since Adam Smith
#4 Profit, income, and the Humpty Dumpty Fallacy

Related 'When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism' and 'Profit for Marxists' and 'The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?'

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REPLY to Barkley Rosser on Feb 14

Like Ricardo, I consider the most elementary case, i.e. wage income and profit. The axiomatically correct macroeconomic Profit Law says for the general case Qm=Yd+(I−Sm)+(G−T)+(X−M). Legend: Qm monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving, G government expenditures, T taxes, X exports, M imports.

All variables are measurable with the accuracy of two decimal places. Therefore, the Profit Law can be tested, in principle, for every country around the globe. There can be no doubt that it will be confirmed without exception.

to Sandwichman

The link #2 to the article in the Westminster Review works probably better from my blog.

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REPLY to Barkley Rosser on Feb 15

You say “But while you have been asked to do so many times, you have never offered a shred of evidence to support this claim that data will support your crank theory. And evidence does not support it.”

Instead of gossiping about the sex life of the House of Saud you should have done some methodological homework, You may have stumbled across Popper’s meme of conjectures and refutation. And you may have realized that there is theoretical physics which provides the conjectures and experimental physics which does the testing. Both tasks require different talents/tools and are normally performed by different people.

Your scientific education apparently ended with the story of Galileo throwing cannon balls from the Leaning Tower of Pisa in order to prove his Law of Falling Bodies. In modern science, the division of labor is firmly institutionalized.

The first calculation of the deflection of light by mass was published by Johann Georg von Soldner in 1801. Einstein calculated the relativistic deviation of light two times. Ironically, he got it wrong the first time in 1908 without realizing it until 1915. Luckily for him, the First World War prevented testing. It was Eddington (and two other expeditions to Brazil and Russia) who tried in 1919 to actually test = measure the deviation during a solar eclipse. Einstein did NOT test relativity himself. The same goes for Higgs and the testing at CERN. Note that the folks at CERN had to build first the biggest and most expensive machine in human history. Something that was obviously beyond the means of the theoretical physicist Higgs.

No scientist ever came up with the idea that von Soldner, Einstein, or Higgs should have tested their theories themselves or with the brain-dead critique that they have “never sullied their hands” with actual empirical data.

So, theoretical physics provides the testable formula and experimental physics does the testing. Likewise, theoretical economics provides the formula, and the econometricians do the testing.

Here is my challenge: MMT asserts in the Keynesian tradition that the macroeconomic balances equation reads (I−S)+(G−T)+(X−M)=0 while I claim that the axiomatically correct balances equation reads (I−S)+(G−T)+(X−M)−(Qm−Yd)=0.

I wonder how long it takes to test such a clear-cut alternative and why neither Post Keynesians, Anti-Keynesians, MMTers nor you can get their asses up and “sully their hands” and settle this fundamental economic question once and for all. Wouldn’t it be a field day for you to PROVE me wrong?

I understand, as an economist, you are busy 24/7 with the WaPo gang, the CIA/SVR meeting, and the sex life of the House of Saud.

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REPLY to Sandwichman on Feb 15

Note that One of the Old School challenged the scientific status of economics: “That which bears the name of Political Economy, is now taught at your University, …, as a science equally true in its principles with Geometry. If it be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”

Note also that economics is still “a mass of fictions”. And the reason why economics is a failed/fake science is that economists can to this day not tell what profit and income is.

Note also that the ‘refutation’of One of the Old School is a semantic shell game that messes up simple algebra.

“In this nomenclature low and high have no reference to amount; they indicate only proportion. If a commodity should at one time sell for ten shillings, of which the labourer received nine, and should afterwards sell for twenty, of which the labourer received fifteen, this, according to Mr. Ricardo’s nomenclature, would be a fall of the labourer’s wages. Though he would receive a larger amount, he would have a smaller proportion. And proportion is all that Mr. Ricardo considers.”

Ricardo defined total income Y as sum of wages W and profits P, i.e. Y=W+P. This gives after transformation 1=1/(1+P/W)+1/(1+W/P) with 1/(1+P/W) = share of wages and 1/(1+W/P) = share of profits. And yes, One of the Old School is right, if wages rise the share of wages increases and the share of profits decreases. The absolute amount and the share move in the SAME direction. However, the critics of One of the Old School confused themselves by simultaneously increasing wages and profits but in different proportion, i.e. wages from 9 to 15 and profit from 1 to 5. Wages seem to rise but actually fall IN RELATION to profit and this is why the share of wages falls. No ambiguity here, no paradox, all plain and simple algebra.

The one thing that the alleged refutation of One of the Old School proves is the utter scientific incompetence of economists. Ricardo got profit theory wrong and neither Walrasianism, Keynesianism, Marxianism, Austrianism, nor Barkley Rosser has realized it until this day. Not to speak of rectification.

As One of the Old School clearly saw in 1829, these folks are disgracing their universities. High time to throw them out.

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REPLY to Barkley Rosser on Feb 16

Your restless attempt to mess up any issue is not even comical. You simply cannot resist the temptation to parade your absolutely irrelevant knowledge of biographical and historical detail. As always, you are missing the essential point.

The essential point is the alleged antagonism between wages and profits which provided the economic argument for Marx’s sociological/political concept of class struggle.

Sandwichman’s introductory quote “There is no other way of keeping profits up, but by keeping wages down.” (David Ricardo) clearly defines the point at issue.

The Westminster reply starts “The first of the principles which ‘the old school’ think so erroneous, is the well-known doctrine of Mr. Ricardo, that, putting rent out of the question, the price of every commodity consists wholly of wages and profits.”

“… putting rent out of the question” means focusing on the relationship between wages and profits and putting rent aside for the moment.

This, of course, is unacceptable for the confused confuser Barkley Rosser because he has a lot to parade about rent and Malthus and Oxford and Cambridge and who was alive and who was dead.

This drivel is, as always, pure disinformation.

The point at issue is that Ricardo’s theory of profit and rent is provably false.#1

This, in turn, means that Political Economy has no scientific merits, a fact that One of the Old School did not fail to mention “That which bears the name of Political Economy, is now taught at your University, …, as a science equally true in its principles with Geometry. If it be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”

This is as true today as it was in 1829 because profit theory is still false, or as the Palgrave Dictionary puts it “A satisfactory theory of profits is still elusive.” (Desai, 2008)


#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

***
REPLY to Sandwichman on Feb 16

The issue of substance theories has been dealt with exhaustively by Mirowski in More Heat Than Light.

So we know definitively that both the Labour Theory of Value and the Utility Theory of Value are dead and buried just like the Flat Earth Theory.

The only interesting question is now where the exit of the scientific graveyard is. Or, as Feynman put it “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.”

***

NOTE on Sandwichman’s ‘Rumble on Wall St. ― No Other Way of Keeping Profits Up!’ on Feb 16

You say “And this is also why I think it would be impossible to empirically confirm Egmont Kakarot-Handtke’s ‘law’ of profit. There is no ‘real’ yardstick with which to measure aggregate profit. If Egmont is right that ‘[m]acroeconomic profit depends in the most elementary case alone on deficit spending, that is, on the change of private or public debt,’ then he is wrong that his profit ‘law’ can be tested empirically and ‘will be confirmed without exception’.”

You are wrong, of course. What you overlook is that there are TWO kinds of profit: monetary profit Qm and nonmonetary profit Qn. Monetary profit emerges in the production-consumption economy and can be measured with the accuracy of two decimal places in all countries with a proper system of National Accounting and at least one intelligent economist. Countries that do not satisfy these conditions may be called scientific shitholes.

Therefore, the structural/systemic/behavior-free/objective/macroeconomic Profit Law#1 will be confirmed without exception in all (non-shithole) countries around the globe.

The market economy, though, consists of TWO entirely different types of markets: the primary markets of the production-consumption economy and the secondary markets of all kinds of real and financial assets.#2 In these markets, non-monetary profits/losses Qn emerge through the re-evaluation of assets. These re-evaluations are highly subjective and can, at the moment at least, be entirely fictitious/fraudulent.

So, there are TWO theories of value and there are TWO entirely different kinds of profits, i.e. objective/measurable monetary profit Qm and subjective and currently not reliably measured non-monetary profit Qn.

As you can see from the correct axiomatic foundations,#3 total profit is given with the 4th axiom as Q=Qm+Qn. The macroeconomic Profit Law relates to Qm and is provably true.#4


#1 First Fundamental Law vs. Fundamental theorem of income distribution
#2 Primary and Secondary Markets
#3 Wikimedia


#4 For details of the big picture see cross-references Profit

***

REPLY to Barkley Rosser, Sandwichman on Feb 18 and Blog-Reference MNE

Barkley Rosser says: “So, to get back to the main issue, where both S-man and the execrable Egmont decided that they were in it together being really serious, neither of them has even recognized the point I made from Ricardo that rent is the third category of income, “

False. I gave you the reference to my paper about rent. Here, once more.#1 The whole point of this thread is to clarify first the relation between wages and profits which is the pivot of all of economics. Your repeated attempts to draw attention away from the point at issue is ridiculous. Your assertion “neither of them has even recognized the point I made from Ricardo that rent is the third category of income” is provably false.” Anybody can check it anytime by browsing the posts above.

Sandwichman says: “The ‘lump of labor’ is FUNDAMENTAL to ‘economic thinking’ and the way that economists disavow the foundation of their very own fetish is to project it on to others.”

False. First of all, there is NO such thing as economic thinking. There is merely the blathering of confused confusers.#2 And you and Barkley Rosser are here and now providing the Smoking Gun proof.

Second, NOT the lump-of-labor is fundamental to economic thinking but profit. Who does not understand what profit is does not understand how the economy works. This applies to all economists between Ricardo and Barkley Rosser/Sandwichman.

You muddleheads do not even understand the existential problem of economics. Marx did: “How can they continually draw 600 p. st. out of circulation, when they continually throw only 500 p. st. into it? From nothing comes nothing. The capitalist class as a whole cannot draw out of circulation what was not previously in it.”

Marx saw the problem but he could not solve it. He drowned in the semantics of the Labour Theory of Value just as the Neoclassicals later on drowned in the verbiage of the Utility Theory of Value.

Just like Ricardo, Marx got the profit theory wrong.#3 The correct answer to the existential problem of economics is that the “capitalist class as a whole” can only “draw out of circulation what was not previously in it” if either the household sector or the government sector throws more into the circulation than they take out, that is, if they run a deficit, that is, if they increase their debt. And this is something that can be observed and measured with the accuracy of two decimal places. The axiomatically correct profit theory is given with this general balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 which fully replaces the false After-Keynesian balances equation (I−S)+(G−T)+(X−M)=0.

Sandwichman says: “Poor, dumb Kaka-root thinks he can overturn ‘unscientific’ economics with ‘scientific’ economics.”

Economics is, according to its self-definition since 200+ years, a science. And everybody who doubts it is reminded each year in no uncertain terms with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”. This Prize, of course, is a fraud because economics is a proto-science or what Feynman called a cargo cult science that has not even managed to get its foundational concepts consistently together. The dire consequences were pointed out by One of the Old School back in 1829: “If it [economics] be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”

The muddleheads of economics sit squarely in the swamp where “nothing is clear and everything is possible”. (Keynes) And when they are told that their inconclusive blather is cargo cult science they pull the ejection seat and claim that there is no scientific truth because of ontological uncertainty and because of Heisenberg and Gödel.#4

It is absurd in the extreme when scientific morons who have not gotten the foundational concepts of their own discipline right and fail at the elementary mathematics of accounting waffle about advanced physics and mathematics. On this score, Barkley Rosser and Sandwichman never disappoint the audience: “Well, S-man, … I have a paper coming out in the Journal of Evolutionary Economics with Simone Landini and Mauro Gallegati on the implications of that theorem for economics, which is a deep jump into such matters.”

We are all looking forward to Barkley Rosser’s jump from the 10m springboard into the empty swimming pool.#5, #6


#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#2 Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist
#3 Karl Marx, fake scientist
#4 Failed economics: The losers’ long list of lame excuses
#5 How economists shoot themselves non-stop in the methodological foot
#6 The insignificance of Gödel’s theorem for economics

February 12, 2018

Economics: a comedy of errors full of intrigue and aberration

Comment on Paul Krugman on ‘Fraudulence of the Fiscal Hawks’

Blog-Reference and Blog-Reference

Paul Krugman tells the story the people like to hear: “There have been many ‘news analysis’ pieces asking why Republicans have changed their views on deficit spending. But let’s be serious: Their views haven’t changed at all. They never really cared about debt and deficits; it was a fraud all along. ... However, pretending to care about the deficit served several useful political purposes. It was a way to push for cuts in social programs. It was also a way to hobble Obama’s presidency.”

Paul Krugman tells the old story of sneaky/corrupt politicians and effectively distracts from the incompetence/corruption of political economists.

The essential point about deficit spending/public debt is this: the axiomatically correct macroeconomic Profit Law is given as Q=Yd+(I−S)+(G−T)+(X−M) which reduces to Q=G−T for Yd, I, S, X, M=0. The simplified macroeconomic profit equation says that the profit of the business sector Q is equal to the deficit G−T of the public sector. It holds Public Deficit = Private Profit.

So, from the standpoint of simple self-interest, the one-percenters and their useful academic/journalistic spokespersons should argue FOR deficit spending and the ninety-nine-percenters and their academic/journalistic spokespersons should argue AGAINST it. Curiously, just the OPPOSITE happens. So, either economists are stupid and do not know how the economy works or they are complicit in a communicative charade.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economists lack the true theory. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/ formally inconsistent and all got the pivotal economic concept profit wrong. Because economists do not have the true profit theory their economic policy guidance lacks sound scientific foundations. Worse, their public policy proposals are in effect counter-productive for the social groups they claim to speak for. It is sheer political schizophrenia that nobody has done more for the one-percenters than the left-wing/liberal/progressive enthusiasts of deficit spending who claim to promote the cause of the ninety-nine-percenters.#1

There is not much use to speculate about the true motives of the loudspeakers in the political Circus Maximus. The fact of the matter is that ― because Public Deficit = Private Profit ― the one-percenters have achieved their goal hands down by simply letting scientifically incompetent spokespersons of the ninety-nine-percenters like Paul Krugman or Stephanie Kelton brilliantly perform their roles as communicatively useful idiots.

Egmont Kakarot-Handtke


#1 Keynes, Lerner, MMT, Trump and exploding profit

Related 'The economist as standup comedian' and 'The real problem with the economics Nobel' and 'Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother' and 'Economists: The Trumps of science' and 'Econoblogosphere: The flawed Top 101' and 'MMT: miscommunication, mistakes, misdirection'. For details of the big picture see cross-references Failed/Fake scientists.

***
REPLY to SDB on Feb 13

You ask “How exactly would lower deficit spending, or no deficit spending, or a deficit surplus, be in the interest of the 99%ers? Aren't profitable businesses the ones doing the employing of the 99%ers? Wouldn't starving the business sector of profits cause a recession and therefore cause unemployment to increase? ”

There are two issues here. Note first of all that proposing better healthcare, education, full employment etcetera is NOT economics but politics. MMT presents itself as a beneficial social movement. But MMT also claims to be an economic theory that explains how the monetary economy works.

My argument is NOT that the social goals are wrong but that MMT does not satisfy the scientific criteria of material/formal consistency. More specifically, because MMT’s foundational balances equation is false the whole analytical superstructure is false, which in turn means that MMT policy guidance has NO sound scientific foundations.

As a consequence, popular MMT slogans like The Debt Doesn’t Matter are false and misleading. Deficit spending has huge distributional effects.

There are many other social movements that argue for higher spending on healthcare or education. But when asked how to pay for it they answer cut military spending or raise taxes. The unique selling proposition of MMT is: run a deficit and print money.

This is the crucial point. Why? Because with increased deficit spending the household sector is taxed in real terms without noticing it and the business sector’s profit increases because the axiomatically correct economic theory tells us that Public Deficit = Private Profit.

For the household sector = ninety-nine-percenters, deficit spending is in real terms NOT superior to taxation but for the business sector it is indeed.#1 Conclusion: MMT is a social bluff package that ultimately benefits the one-percenters.

Right policy depends on true theory. MMT is NOT the true theory but is refuted on all counts.#2 MMT is soapbox economics.

The obvious problem is that the average person can only determine whether she likes/dislikes the proposal of a party/movement but not whether the underlying economic theory is true/false.#2 Fact is that deficit spending is the most idiotic measure to attain social objectives. To be sure, that is NOT to say that the objectives are wrong.

Mr. Trump is executing MMT policy and this should give everyone pause to wonder what MMT is all about.


#1 MMT, money printing, stealth taxation, and redistribution
#2 For the full-spectrum refutation see cross-references MMT

***
REPLY to SDB on Feb 14

You ask “’Because with increased deficit spending the household sector is taxed in real terms without noticing it...’ How? By way of inflation?”

I have answered this question already and given the link above.#1 No, real taxation is NOT by inflation but by an imperceptible one-off price hike. Inflation is the big red herring.#2, #3 The disastrous effect of a growing public debt is NOT on inflation but on the distribution of income and wealth.

You say “Seems that you may be assuming a full-employment economy when you state without qualification that deficit spending taxes the household sector in real terms.”

No, I don’t. For the axiomatically correct employment theory see #4.

You say “Let’s set aside your beef with Macroeconomic theory.”

No. Right policy depends on true theory. MMT is NOT the true theory but is refuted on ALL counts. The blogging MMT imbeciles (Ralph Musgrave, Matt Franko, MRW, Brian Romanchuk, Calgacus, Tom Hickey, etcetera) know this very well since October 2016.#5 And the MMT spokespersons know it, too.#6

Make no mistake, to propagate a false and definitively refuted theory is scientific fraud. And to promise social goodies which are paid for in real terms by stealth taxation of the ninety-nine percenters while boosting profit through deficit spending is political fraud.


#1 MMT, money printing, stealth taxation, and redistribution
#2 MMT was right all along: Gov-Deficits do NOT cause inflation
#3 How MMT got inflation wrong
#4 Full employment through the price mechanism
#5 The final implosion of MMT
#6 Cryptoeconomics ― the best of Bill Mitchell’s spam folder

February 10, 2018

MMT: miscommunication, mistakes, misdirection

Comment on T Sabri Öncü’s ‘Miscommunicated Monetary Theory’

Blog-Reference

The problem of MMT is NOT that is miscommunicated but that it is positively false, i.e. a materially/formally inconsistent theory.

For the full-spectrum refutation see cross-references MMT.

MMT is promoted/communicated by the very nice people of Warren Mosler’s sales team who, as a matter of fact, are as incompetent as can be.* MMT has NO scientific merits whatsoever, it is just brain-dead political sloganeering.

Egmont Kakarot-Handtke


* See meme on Wikimedia


***
COMMENT on Tom Hickey on Feb 11

You say “’Money’ can serve as a higher order abstraction rather than only a metaphor or figure of speech. The use of higher-order abstraction is a serious problem in econ owing to ‘terminological inexactitude.’ Many so-called experts cannot deconstruct this level of abstraction properly, but the MMT economists have regarding ‘money’.”

You claim that MMT is particularly good at higher order abstraction. Warren Mosler, though, told us just the opposite, viz. that the strong point of MMT is superior operational knowledge “So, how am I uniquely qualified to be promoting these proposals? My confidence comes from 40 years’ experience in the financial and economic realm. I would venture that I’m perhaps the only person who can answer the question: ‘How are you going to pay for it?’ My book takes on this issue and encourages the return of economics study to the operational realities of our monetary system.”#1

Fact is that MMT suffers from schizophrenia and the Fallacy of Insufficient Abstraction. The operational details of money creation/destruction can be gleaned from the PR brochures of the FED or any other central bank. Monetary theory, on the other hand, abstracts from the operational details and gives a functional account of money as a part of what Keynes called the “monetary theory of production.” In other words, the theory of money has to be developed in the space of a GENERAL macroeconomic framework.

MMT applies the Keynesian framework. Unfortunately, MMTers have not realized that Keynes is the poster boy for the Fallacy of Insufficient Abstraction. Keynes messed macro up.#2 MMT is based on the Keynesian balances equation which is provably false. As a consequence, the whole analytical superstructure of MMT is false, i.e. scientifically worthless. Correct operational descriptions cannot compensate for mistakes of higher order abstraction.

The problem of MMT is NOT that its operational descriptions are false or miscommunicated but (i) that it is based on false macroeconomic premises, and (ii), that it suffers from debilitating ‘terminological inexactitude’ with regard to the foundational concepts profit, income, sectoral balances etcetera.#3, #4


#1 Seven Deadly Innocent Frauds of Economic Policy, p. 12
#2 How Keynes got macro wrong and Allais got it right
#3 See, for example, Bill Mitchell
#4 See, for example, Stephanie Kelton

***
COMMENT on Tom Hickey on Feb 11

You are lost in irrelevant operational details. For the axiomatically correct approach see 'Fixing the loanable funds blunder'.

***
REPLY to Calgacus on Feb 11

You claim “As I have said, before, I don’t think you understand MMT ― you are focusing on irrelevant operational & other details and mistakenly call them ‘foundations’ and dismissing and ignoring the genuine foundations.
‘MMT is based on the Keynesian balances equation’
No. It. Isn’t.”

Yes, it is.

(i) Go to the head of this blog, look up the section Links, click Modern Monetary Theory-Wikipedia, go to the section Vertical Transactions, read “Therefore, budget deficits add net financial assets to the private sector; whereas budget surpluses remove financial assets from the private sector. This is widely represented in macroeconomic theory by the national income identity: G−T=S−I−NX where G is government spending, T is taxes, S is savings, I is investment and NX is net exports.”

(ii) Go to Google Images. Look intensively at this picture, focus first on the sectoral balances formula, then take notice of the MMT actors.

Conclusion: The sectoral balances equation is tattooed on the forehead of every MMTer. It is provably false. Because of this, the rest of MMT is false. For a pertinent example see again Wikimedia.

There is NO miscommunication of MMT. The whole is genuine proto-scientific garbage.

***
REPLY to Six on Feb 12

You say “The sectoral balances equation is not provably false and is not tattooed on anyone’s forehead.”

Warren Mosler, founder of MMT, says “Deadly Innocent Fraud No.3: Federal Government budget deficits take away savings. Fact: Federal Government budget deficits ADD to savings.” Or “Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us ― businesses and households, residents and non residents ― what is called the ‘non government’ sector. In other words, government deficits equal increased ‘monetary savings’ for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.”

This “accounting fact” is no fact at all because you and the founding fathers/mothers of MMT and the rest of the MMT crowd is too stupid for the elementary mathematics of macroeconomic accounting.

You claim that what is presented on Wikipedia and all over the econoblogosphere by the spokespersons of MMT is actually not MMT but you cannot tell what the foundational propositions of MMT are.

Note that proposing better healthcare, education, full employment etc is NOT economics but politics and that the insight that the state can pay for everything by printing money is NOT exactly new “Adam Smith, when he wrote his Wealth of Nations, and Burke, when he produced his famous speech on economic reform, understood by political economy a branch of the science of the statesman or legislator, a theory of practice, the science of the prudent management of the public finances. The growth of the huge debts which weighed on the great military nations would end in proving their ruin. This was especially true of England, which had become immensely in debt through the conquest of her colonial Empire.” (Halévy)

The only thing that is new with MMT is to justify deficit spending, which had worked so fine for centuries in the military realm, for the social realm and to conceal the accounting fact that Public Deficit = Private Profit, no matter on what the printed money is spent.

The mission of MMT is to lobotomize the general public (Debt Does Not Matter) by promising social goodies. MMT is NOT economics and NOT a scientifically valid theory but a marketing relaunch of the age-old policy of stealth taxation/profit-boosting.#1, #2


#1 Keynes, Lerner, MMT, Trump and exploding profit
#2 MMT, money printing, stealth taxation, and redistribution

Related 'Economics: a comedy of errors full of intrigue and aberration'.

***
REPLY to Six on Feb 12

You say “’the accounting fact that Public Deficit = Private Profit ...’ This is not some great new revelation, by the way. I studied it in the 80s and it was old news at the time.”

I wonder why you have not told this Warren Mosler, Stephanie Kelton, Bill Mitchell, Tom Hickey, Calgacus and the rest. They still suffer from the hallucination that Public Deficit = Saving of the private/non-government sector: “Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.” (Mosler)#1

It seems that the old news of the 80s has not yet reached the MMTers. These dull folks are 40+ years behind the curve.


#1 See also Mitchell

February 7, 2018

Profit, income, and the Humpty Dumpty Fallacy

Comment on Timothy Taylor/Conversable Economist on ‘Behind the Declining Labor Share of Income’

Blog-Reference

Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words, economists have NO idea what the pivot of their subject matter is.#1

Because profit is ill-defined, income/distribution is ill-defined, and this is due to the Humpty Dumpty Fallacy ― one of the worst idiocies of economics.

In the elementary investment economy, macroeconomic profit Q is defined as the sum of profit in the consumption goods industry, i.e. Qc≡C−Ywc, and the investment goods industry, i.e. Qi≡I−Ywi, that is, Q≡(C−Ywc)+(I−Ywi) or Q≡C+I−Yw (i). Profit Q is greater than zero if the value of output C+I is greater than total wage income Yw.

Now, Humpty Dumpty introduces a redundant definition by saying that profit may be called “income of the business sector” and that this “income” can be added up with the wage income of the household sector to “total income” Ψ thus
(a) Ψ≡Q+Yw  and now (i) is rewritten
(b) Q+Yw ≡C+I and then, hey presto,
(c) Ψ≡C+I that is, “total income” is “by definition” identical to “value of output” or in the usual sloppy parlance “income = value of output” which obviously contradicts (i) and ― strangely enough ― makes profit invisible.

This definitional idiocy can be traced back to Keynes “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT p. 63)

Without the true profit theory, there is no true distribution theory. The axiomatically correct macroeconomic Profit Law is given as Q=Yd+(I−S)+(G−T)+(X−M) [1], Legend: Q macroeconomic profit, Yd distributed profit, I investment expenditure, S household sector saving, G government expenditures, T taxes, X exports, M imports. For the world economy as a whole holds X, M=0.

The nominal labor "share" λ is defined as the quotient of wage income Yw and the sum of wage income and profit, that is, λ≡Yw/(Q+Yw) with Q given by [1] above. To recall, Ψ≡Q+Yw is redundant/inadmissible, hence profit is NOT a "share" of "total income Ψ".

Fact is that neither market power nor capital intensity nor information technology nor union weakness can ultimately account for a falling nominal labor "share" λ. The main drivers of increasing macroeconomic profit Q have been in the past decades the increased deficit spending of the household- and the government sector. The other factors can only account for the distribution of profit Q between firms but NOT for the total amount.#2, #3

Traditional distribution theory is scientifically worthless because the foundational economic concepts profit and income and saving are ill-defined.* Worse, because profit is ill-defined/ poorly understood the whole of economics is proto-scientific garbage.

Egmont Kakarot-Handtke


#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Keynes, Lerner, MMT, Trump and exploding profit
#3 For details of the big picture see cross-references Profit and cross-references Refutation of I=S.

*


February 4, 2018

From false microfoundations to true macrofoundations

Comment on Simon Wren-Lewis on ‘Large models, small models and Brexit’

Blog-Reference

Anyone can climb on a soapbox and tell the world how they would save the country or humanity ― except an economist. An economist needs the true theory “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

This, then, is the methodological challenge “The highest ambition an economist can entertain who believes in the scientific character of economics would be fulfilled as soon as he succeeded in constructing a simple model displaying all the essential features of the economic process by means of a reasonably small number of equations connecting a reasonably small number of variables. (Schumpeter)

Economists do not have the true theory/model. The failure of economics had been programmed by the founding fathers with the definition of the subject matter as social science and later on with this very specific guideline “It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories.” (Arrow)#1

Arrow’s definition covers General Equilibrium Theory, Marshallian partial analysis, Behavioral Economics, DSGE, Agent-Based Models, and verbalized/common sense/ad hoc/special purpose models.

The common denominator of these approaches is that they take individual/social behavior as a starting point and then try to explain the behavior of the economy as a whole. The methodological defect of the microfoundations approach is that NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works. Economics does not conform to Aristotle’s general definition of science “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.”

Because the premises/microfoundations are NOT certain/true/primary a paradigm shift is necessary. Economics has to move from microfoundations to macrofoundations. For a graphical summary of the methodological basics see Wikimedia.#2

Methodologically it holds, (i) all microfoundations approaches are axiomatically dead, (ii) all Keynesian approaches are defective with regard to the definition of macroeconomic profit/income,#3 (iii) if it isn’t macro-axiomatized it isn’t economics,#4 (iv) lacking the true theory, economists have not more to offer than educated/computer-aided common sense.

Egmont Kakarot-Handtke


#1 This translates into the neo-Walrasian axioms “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)
#2 Wikimedia, From Microfoundations to Macrofoundations

Source of inserted chart: Simon Wren-Lewis, mainly macro blog

#3 Is Nick Rowe stupid or corrupt or both?
#4 The core of macroeconomic premises reads: (A0) The objectively given and most elementary systemic configuration of the economy consists of the household and the business sector which, in turn, consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Related 'From false microfoundations to true macrofoundations (I)' and 'From false micro to true macro: the new economic paradigm' and 'Dilettantes at the end of the coal-pit' and 'Macro for dummies (II)' and 'The new macroeconomic paradigm'.