August 31, 2017

Robert Solow and Lars Syll, fake scientists

Comment on Lars Syll on ‘Damon Runyon’s Law’

Blog-Reference and Blog-Reference

It is always surrealistic when an incompetent heterodox economist cites an incompetent orthodox economists approvingly. Fact is that Walrasianism, Keynesianism, Marxianism, Austrianism is mutually contradictory and provably false, i.e. materially and formally inconsistent. And both, the orthodox economist Solow#1 and the heterodox economist Syll#2 play an active role in this overall scientific bankruptcy.

Failure is not the only commonality between Orthodoxy and Heterodoxy, both subscribe also to the same excuses. Here is Solow’s comprehensive list: “Economics is a strange sort of discipline. The booby traps I mentioned often make it sound as it is all just a matter of opinion. That is not so. Economics is not a Science with a capital S. It lacks the experimental method as a way of testing hypotheses. . . . There are always differences of opinion at the cutting edge of a science, . . . . But they last longer in economics . . . and there are reasons for that. As already mentioned, rival theories cannot be put to an experimental test. All there is to observe is history, and history does not conduct experiments: too many things are always happening at once. The inferences that can be made from history are always uncertain, always disputable, . . . You can’t even count on a long and undisturbed run of history, because the ‘laws’ of behavior change and evolve.”#3

All this reveals only a complete misunderstanding of what science and economics is all about. This double incompetence manifests itself in two statements: “Unfortunately, however, economics is a social science.” and “… I suspect that the attempt to construct economics as an axiomatically based hard science is doomed to fail.”

Science consists of two essential elements: “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) Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing.#4

What both Orthodoxy and Heterodoxy fail to understand is that economics is neither a social science nor a natural science but a system science. The evident scientific incompetence of the representative economist consists in not having figured out until this very day what profit ― the pivotal concept of his subject matter ― is.

The methodological blunder of economists consists in applying either Walrasian microfoundations or Keynesian macrofoundations. Because both these axiomatic foundations are provably false economics has to move on to the correct macrofoundations. This move is called paradigm shift.#5

The current state of economics is that of a fake science or what Feynman famously called cargo cult science. This intolerable state is due to the scientific incompetence of economists and NOT to the alleged fact that there are not testable economics laws. These laws, though, refer to the economy as a system and NOT to human behavior.

In order to get out of the cul-de-sac, economics has to be redefined: Economics is the science which studies how the monetary economy works. The study of Human Nature/motives/behavior/action is the subject matter of psychology, sociology, history, biology, political science, anthropology, social philosophy, and NOT the economist’s business.

It should be plain that Walrasians, Keynesians, Marxians, and Austrians in general and Robert Solow and Lars Syll, in particular, will never make it into the history of scientific thought except perhaps as a cautionary example for the unsurpassable idiocy of fake scientists.

Egmont Kakarot-Handtke

#1 Sending Solow’s growth model to the dump of proto-scientific history
Pants kicking is over, let’s do serious economics now
Solow and the ludicrousness of economics
When substandard thinkers dabble in science it is called economics
#2 Say hello to Lars Syll, Keynes’s last parrot
#3 Failed economics: The losers’ long list of lame excuses
#4 See also ‘Quantum Theory Rebuilt From Simple Physical Principles
#5 First Lecture in New Economic Thinking

MMT, fake science

Comment on Bill Mitchell on ‘Reclaiming the State’

Blog-Reference and Blog-Reference

In the beginning, there was Political Economy. J. S. Mill defined it clearly as a social science: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.”

Clearly, from the very beginning the two issues ‘how society works’ and ‘how the economy works’ were not properly kept apart.

Then, there is the political sphere and there is the scientific sphere. It is quite obvious that both are ontologically different and because of this, it is of utmost importance to keep them apart.

Politics is about the realization of the Good Society. This presupposes an idea what the Good Society is and the practical capacity to make things happen. In very general terms, the political sphere is about values and action, and the crucial distinction is between good/bad or better/worse. Science is about knowledge and the crucial distinction is between true/false with truth unequivocally defined by material and formal consistency.

Scientific knowledge is embodied in the true theory. The true theory is the best possible mental representation of reality. Scientific knowledge satisfies two criteria: material and formal consistency. The 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)

So, how does MMT fit into the grand scheme?#1


The first thing to realize is that economics is still a hodgepodge of social science and political agenda pushing. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/ formally inconsistent, and all got profit wrong. With the pluralism of provably false theories economics sits squarely at the proto-scientific level. Economics has NO truth value, merely some political use value.#2

Bill Mitchell’s post ‘Reclaiming the State’ argues for more national/regional sovereignty. Sovereignty, clearly, is a political issue and NOT an economic issue even though it has economic implications.

Bill Mitchell is out of economics and obviously pushing a political agenda. Of course, this is what most economists#3 do but this does not make it any better. Economists could know from J. S. Mill that they are NOT entitled to dabble in politics. What is worse, though, is that Bill Mitchell underpins his political arguments with MMT which claims to be an economic theory. As such, MMT is supposed to explain how the actual economy works. Unfortunately, MMT is materially and formally inconsistent, that is, scientifically worthless.#4

Economics always claimed to be a science but never rose above the level of a proto-science. What MMTers fail to understand is that economics (i) is NOT a social science, and (ii), does NOT scientifically support any political program. Both right-wing and left-wing economists commit a crime against science by weaponizing it in a political confrontation.

MMT is materially/formally inconsistent, does not deserve the title of a science, but is politics in a bluff package, just like Walrasianism, Keynesianism, Marxianism, and Austrianism.

Egmont Kakarot-Handtke

#1 Wikimedia, Positioning of economics
#2 Economics: 200+ years of scientific incompetence and fraud
#3 Krugman is not an economist
#4 For the full-spectrum refutation of MMT see cross-references


Related 'MMT: another case of inverted economics'

August 30, 2017

Keynesians ― terminally stupid or worse?

Comment on Dirk Ehnts on ‘Keynes on Savings and Investment’

Blog-Reference and Blog-Reference

Eighty years ago, Keynes got macro wrong and Keynesians did not notice it until this very day.

Dirk Ehnts quotes Keynes: “S=I at all rates of investment.” and comments enthusiastically: “This is very enlightening. The ‘General Theory’ also contained the issue of savings and investment, but the quote above nails it. There is no ‘supply’ and ‘demand’ for capital, hence savings and investment do not need anything to move so that there can be equilibrium.”

There is no better proof of the abysmal scientific incompetence of economists in general and of Keynesians in particular than S=I.

Here is the evidence from the General Theory: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit. “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false.#1 Let this sink in: Keynes had NO idea of the fundamental concepts of economics, viz. profit and income. Keynes, though, was not alone: “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” (Mirowski) Fact is, the profit theory is false since Adam Smith. Economics is scientifically worthless since 200+ years.

What has to be done is to replace Keynes’s false macrofoundations by the correct macrofoundations. The pure production-consumption economy is, for a start, defined by three macro axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit Qm≡C−Yw, monetary saving Sm≡Yw−C). The graphical representation is shown on Wikimedia.#2, #3


It always holds Qm+Sm=0 or Qm=−Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit (surplus) equals the household sector’s surplus (deficit). Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law. It follows directly from the definition of the business sector’s monetary profit Qm≡C−Yw and the definition of the household sector’s monetary saving Sm≡Yw−C. From this immediately follows that Keynes’s foundational identity “Income = value of output” is false.

For the investment economy, the profit equation reads Qm=I−Sm. Legend: Qm monetary profit, I: investment expenditures, Sm monetary saving/dissaving. The business sector’s investment expenditures and the household sector’s saving/dissaving are completely independent and NEVER equal.

There is NO such thing as an equality of investment and saving, neither ex-ante nor ex-post, and there is NO such thing as an equilibrium of I and S. Keynes was too stupid to understand this, and After-Keynesians are even worse.#4

Egmont Kakarot-Handtke

#1 Why Post Keynesianism Is Not Yet a Science
#2 Wikimedia, The pure production-consumption economy
#3 For the detailed description see ‘How the intelligent non-economist can refute every economist hands down
#4 For more details see cross-references Refutation of I=S

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REPLY to Dirk Ehnts on Sep 1,3 see also here

You say: “I don’t understand your claim because it comes without any argument.”

The proof has been given that Qm=−Sm in the pure production-consumption economy and Qm=I–Sm in the investment economy. In plain text, the proof says that saving and investment are NEVER equal.#1

You say: “Regarding wording, how about: ‘saving is the accounting record of investment’? I find it immensely useful!”

In their pathetic incompetence, economists got even the elementary mathematics of accounting wrong.#2 The wording ‘saving is the accounting record of investment’ is the very proof that economists cannot even put 2 and 2 together.

You say: “What I don’t find useful is the inclusion of profits in macroeconomic models.”

Macroeconomic profit exists and economists should know and tell what it is. Neither orthodox nor heterodox economists do it, though, because they have no idea what the pivotal concept of their subject matter is.#3

You say: “Of course, the question what drives investment needs to be attacked using the concept of profit, but that is a different question from what determines the level of unemployment, which was Keynes’ question in the GT!”

Keynes’s employment theory is false because I=S ― and, by implication, the multiplier ― is false which, in turn, is false because Keynes never understood what profit is.#4

Because Keynes’s premise Income = value of output is false, ALL I=S/IS-LM models from Keynes/Hicks to Krugman/Ehnts are provably false.#5, #6

After-Keynesians are light years behind the curve. The scientific level of economists in general and Dirk Ehnts, in particular, is worse than zero.

#1 How Keynes got macro wrong and Allais got it right and
The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#2 A tale of three accountants and cross-references Accounting
#3 Heterodoxy, too, is scientific junk
#4 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
#5 Getting out of IS-LM = Getting out of despair
#6 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

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COMMENT on Nick Edmonds, Dirk Ehnts on Sep 5, see also here

Dirk Ehnts subscribes to: “S = I at all rates of investment. Y either definable as C+S or as C+I. S and I were opposite facets of the same phenomenon they did not need a rate of interest to bring them into equilibrium for they were at all times and in all conditions in equilibrium.”

Nick Edmonds maintains: “The expected real rate of interest is in some sense the price of savings and so, in principal, changes in this expected rate might be able to reconcile desired saving and desired investment. In a barter economy, goods for current delivery can be traded for promises of the same goods for future delivery.”

Keynes was right on two points: (i) he has to be credited for realizing that the economics of Jevons/Walras/Menger/Marshall was false at its core and that nothing less than a paradigm shift was needed, (ii) that economic analysis has to start with the ‘monetary theory of production’ and NOT with some silly barter economy of the Sraffa type.#1

From the analysis of the most elementary economic configuration, the pure production-consumption economy, follows for the balances Qm+Sm=0 or Qm=–Sm, in other words, at the heart of the monetary economy is an identity: the business sector’s deficit=loss (surplus=profit) equals the household sector’s surplus=saving (deficit=dissaving). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the Profit Law.#2

This, first of all, tells one that the profit theory is false since Smith and Ricardo.#3 And, secondly, this tells one that the theory of saving and investment is false by implication. It always holds Qm=I−Sm, that is, investment and saving are NEVER equal, neither in accounting nor in reality.#4

All I=S/IS-LM models are provably false from Wicksell/Keynes/Hicks onward. Because MMT is built upon the false Keynesian balances equations it is false, too.#5

#1 The futile attempt to recycle Sraffa
#2 How the intelligent non-economist can refute every economist hands down
#3 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#4 Rectification of MMT macro accounting
#5 For the full-spectrum refutation of MMT see cross-references

MMT: another case of inverted economics

Comment on Bill Mitchell on ‘Fiscal policy is effective, safe to use, and markets know it’

Blog-Reference and Blog-Reference

Tom Hickey sums up: “The goal is run a policy that optimizes use of available resources in the present, while also generating the economic capability to increase real resources for future use. The purpose of MMT as a ‘policy science’ is showing how this is possible based on the actual operations of a modern monetary production economy.”

This is the wrong priority. In order to see this, one has to get out of the forever inconclusive discussion about monetary and fiscal policy and to look at the panorama of the failed science called economics.

There is political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Economic policy presupposes knowledge of how the actual economy works. This knowledge is embodied in 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)

Because of the lack of the true theory the policy guidance of economists ― Walrasians, Keynesians/MMTers, Marxians, Austrians, and Pluralists ― has NO sound scientific foundations.

Economics had the bad luck to start as Political Economy. This means that the political agenda had been given and the argumentation had to support the agenda. This is the wrong sequence.

This is the difference between theoretical economics (= science) and political economics (= agenda pushing): “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)

Theoretical economics had been hijacked from the very beginning by political economists. Political economics has produced NOTHING of scientific value in the last 200+ years.

There is absolutely no use to follow the discussion between what Bill Mitchell calls mainstream and progressives. Both sides lack sound scientific foundations, that is, the true theory. MMTers have until this day not realized that their foundational premise and their elementary accounting identities are false.#1

The general public is confronted with conflicting economic policy messages and cannot see that they have no sound scientific foundations. The economist distinguishes himself from the soap box propagandist and the snake oil seller by claiming that his policy proposals are based on the true theory. This is NOT the case.

From the standpoint of science, the economist is worse than the snake oil seller and fraudster because by posing as a scientist he, in addition to causing severe economic damages,#2 corrupts the integrity of science as an even worse collateral damage.#3

Egmont Kakarot-Handtke

#1 For the point-by-point refutation of MMT see cross-references
#2 Mass unemployment: The joint failure of orthodox and heterodox economics
#3 Scientists and science actors


Related 'The moralizing economist is not a good guy but a fake scientist'

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COMMENT on Tom Hickey on Sep 1

Hayek was a political agenda pusher and his position was anti-state. His information theory of market interaction is not more than an interesting story. Hayek never produced a scientifically valid proof that the market system is in a very general sense self-stabilizing. Hayekian “economics” is proto-scientific crap.#1

Mitchell is a political agenda pusher and his position is pro-state. His monetary theory of market interaction is not more than an interesting story. Mitchell never produced a scientifically valid theory of how the modern monetary economy works and no proof that it is inherently unstable. MMT “economics” is proto-scientific crap.#2

As a result, we have neither the scientifically valid proof that the monetary economy works fine in principle and needs no state intervention nor the scientifically valid proof that the monetary economy is inherently unstable and continuously needs compensating state intervention.

So, both the anti-state and the pro-state position lacks sound scientific foundations simply because economics as a whole is a failed science. Both Hayek and Mitchell are political agenda pushers who abuse economics, which claims since 200+ years to be a science, in a low-level academic sitcom. Both Hayek and Mitchell have to be expelled from the sciences.

The alternative is that economics gives up the pretensions to science and first of all abolishes the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.#3

#1 Hayek and other informationally retarded proto-economists
#2 For a full-spectrum refutation of MMT see cross-references
#3 The real problem with the economics Nobel

August 29, 2017

The moralizing economist is not a good guy but a fake scientist

Comment on Ben Chu/Independent on ‘After a long history of avoiding the morality factor, economists are beginning to include it in their work’

Blog-Reference

There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.

Economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong. To repeat, the representative economist does until this day NOT know ― what he is supposed to know because it is his and nobody else’s subject matter ― what profit is: “A satisfactory theory of profits is still elusive.” (Palgrave Dictionary, Desai, 2008)

Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics has produced NOTHING of scientific value in the last 200+ years. Economics is a failed science or what Feynman called a cargo cult science.

There is the political sphere and there is the scientific sphere. It is quite obvious that both are fundamentally different and because of this, it is of utmost importance to radically separate the two. The mixing of the two is the economists’ moral equivalent of the Fall of Man.

Politics is about the realization of the Good Society. This presupposes an idea what the Good Society is and the practical capacity to make things happen. In very general terms, the political sphere is about values and action, and the crucial distinction is between good/bad or better/worse. Science is about knowledge and the crucial distinction is between true/false with truth unequivocally defined by material and formal consistency. To mix politics and science is to corrupt science.#1

Economics is meant to be a science and the economist has to satisfy scientific standards and NOTHING else. Scientific standards are well-defined since antiquity: “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)

Since Adam Smith/Karl Marx economics is explicitly defined as science. The general public is year after year reminded of this fact with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.#2 And every economist learned in Econ 101: “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” (Robbins)

Clearly, economics is since 200+ years a self-declared science. Clearly, the four main approaches are materially and formally inconsistent. Clearly, there is a contradiction.

Economics needs a paradigm shift. In methodological parlance, the Walrasian microfoundations and the Keynesian macrofoundations have to be fully replaced by an entirely new set of axioms. Therefore, the one and only question is: How is it done? That much is clear, it is NOT done
(i) by endlessly kicking the dead horse of Orthodoxy without ever coming up with a valid alternative; traditional Heterodoxy, too, is a scientific failure;
(ii) by blind empiricism and microeconomic case studies;
(iii) by adapting the underlying morality of current political economics instead of executing the final separation of politics and science.

The point to grasp is: economics is a system science and all questions about Human Nature/motives/behavior/action are NOT the economists’ business but have to be left to psychology, sociology, anthropology, history, Political Science, biology, etcetera.

The representative supply-demand-equilibrium economist is lost for science and can only continue with cargo cult science. For him New Economic Thinking amounts to moral window dressing.#3

At this year’s Lindau Nobel Laureate Meeting
• Oliver Hart/Luigi Zingales presented a paper that looked at how the personal morality of shareholders might affect the behavior of the companies in which they invest;
• Jean Tirole/Armin Falk presented a paper that tried to model behavior taking into account how certain popular “narratives” can inhibit people from doing what they would normally consider the right thing.

All this is a continuation of cargo cult science.#4 Fresh moralizing is not a substitute for the urgently required New Economic Thinking. Moralizing is political economics and political economics is fake science.

Egmont Kakarot-Handtke

#1 The irrelevance of populism for economics
#2 The real problem with the economics Nobel
#3 New Economic Thinking, or, let’s put lipstick on the dead pig
#4 Economics is NOT about Human Nature but the economic system


Related 'Feynman Integrity, fake science, and the econoblogosphere' and 'Ditch scientific incompetence!' and 'The economist as moralist' and 'New economic thinking = old political fake' and 'Gossip economics' and 'Economics: Poor philosophy, poor psychology, poor science' and 'Making the economy the focus of the economists’ dialogue' and 'Is Paul Krugman necessary?' and 'Do not moralize — simply beat them' and 'How to be a good scientist' and 'Confounding Is and Ought: the economist as moralist' and 'Knowledge vs. Belief' and 'Poor philosophy, poor science, poor job'. For more details see cross-references Political economics.

August 28, 2017

MMT: soapbox economics just like the others

Comment on Peter Cooper on ‘The Social Economy and the Potential Inherent in Currency Sovereignty’

Blog-Reference and Blog-Reference

Ninety-nine percent of human communication is storytelling, only one percent is science. Scientific knowledge is embodied in the true theory. The true theory is the best possible mental representation of reality. Scientific knowledge satisfies two criteria: material and formal consistency. The 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)

MMTers do NOT have the true theory. They do not even know what a theory looks like: “A scientific deductive system (‘scientific theory’) is a set of propositions in which each proposition is either one of a set of initial propositions … or a deduced proposition … in which some (or all) of the propositions of the system are propositions exclusively about observable concepts (properties or relations) and are directly testable against experience.” (Braithwaite)

MMTers do not have the true theory but they have a story. The story line goes like this:

(i) “At the macro level, a lack of monetary demand in the present will result in unemployment or underemployment of workers who otherwise could be contributing to the development of technology and future productive capacity.”

(ii) “In the prevailing economic system, money matters. Not only will production for exchange fail to occur when demand for future output is expected to be weak, but production will typically not even take place until monetary expenditure has occurred. In most lines of business, capitalist firms need to pay wages before the production process is complete and output sold.”

(iii) “It is not just that, by definition, spending equals income. It is that spending, logically, is the determiner of income and income the mere result.”

(iv) “We know, of course, where the money comes from. There are essentially only two origins: lending (whether public or private) and government spending. The money, from inception, must be created ex nihilo for capitalist production actually to take place.”

(v) “… a currency-issuing government’s capacity to override profit imperatives makes possible a broadening and enriching of social life, a reshaping of the workplace and resetting of economic priorities, ….”

The MMT story line contains an employment theory (i), a money theory (ii), (iv), an income-expenditure model (iii), and a profit theory (v). All these elements are false because MMT is built upon this false premise: “It is not just that, by definition, spending equals income.” MMT builds on a macroeconomic income and profit definition that is false since Keynes’s General Theory.#1

As Aristotle said 2000+ years ago: “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 pivotal premise of MMT is neither certain, true, nor primary. Because the premise is false the whole theoretical superstructure is false.#2 This property MMT shares with Walrasianism, Keynesianism, Marxianism, and Austrianism. Economics is proto-scientific rubbish since Adam Smith and MMT is part of it.

Egmont Kakarot-Handtke

#1 For the point-by-point refutation of MMT see cross-references
#2 As Thomas Aquinas put it: “Quia parvus error in principio magnus est in fine.” or “A small mistake in the beginning is a big one in the end.”

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Screenshot Aug 29
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Screenshot Aug 31
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REPLY to Dean on Aug 31

You ask: “What would happen if everyone was no longer allowed to save with the proviso that if any household or business was then on the brink of insolvency the govt bailed them out in order to get them back to solvency?”

For the investment economy, the elementary Profit Law reads Qm≡I-Sm. Legend: Qm monetary profit, I: investment expenditures, Sm monetary saving/dissaving. The business sector’s investment expenditures and the household sector’s saving/dissaving are completely independent and NEVER equal.

So if saving Sm is set to zero overall monetary profit Qm goes up.*

* For more details see ‘Keynesians ― terminally stupid or worse?

August 27, 2017

A bitter pill for political economists

Comment on Simon Wren-Lewis on ‘Medicine and the microfoundations hegemony in macroeconomics’

Blog-Reference

When economists are at the end of their wits they turn to analogies and metaphors. Simon Wren-Lewis is a case in point: “I’m beginning to think I should have made much more of analogies between economics and medicine in discussing what I call the microfoundations hegemony: the idea that the only ‘proper’ macroeconomic models are those that have all their equations consistently derived from microeconomic theory.” And he concludes: “That some macroeconomists (I call them microfoundations purists) can argue that you should model and give policy advice based not on what you see but on what you can microfound represents something that I cannot imagine any philosopher of science taking seriously (after they had stopped laughing).”

Nobody can take this methodological absurdity seriously. The fact to start with is (i) that microfounded macro is one of the worst blunders in the history of modern science, and (ii), that the representative economist ― Simon Wren-Lewis included ― cannot get his head around it until this day.

The political economist has an instrumental relationship to science and uses theory as a means to an end. Given his political priorities, he simply suspends theory if it comes in the way of agenda pushing.

The difference between scientist and political agenda pusher is this: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)

Economics claims to be a science and, by consequence, the economist has to satisfy scientific standards and NOTHING else. Scientific standards are well-defined since antiquity: “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)

If the facts contradict microfounded macro it is refuted and has to go out of the window. It is as simple as that. It is NOT possible to say, if a theory contradicts the facts I suspend the theory for a while and march on with analogies, metaphors, common sense, and populism. A scientist under NO circumstances does what is second nature to a political agenda pusher: “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)

Microfounded macro is NOT the true theory. In fact, Walrasian microfoundations are false since 140+ years.* Unfortunately, Keynesian macrofoundations are false since 80+ years. Both approaches have already been dead in the cradle without economists ever realizing it. What any philosopher of science has to say to the representative mico- and macrofounded economist (after they had stopped laughing) is: You are fired!

Egmont Kakarot-Handtke

* First Lecture in New Economic Thinking


Related 'Failed economics: The losers’ long list of lame excuses'

August 26, 2017

Austerity: Who takes the little man for a ride?

Comment on Lars Syll on ‘The balanced budget mythology’

Blog-Reference

The issue of austerity or public deficit spending/public debt is framed for the general public a.k.a. the little man as a moral tale. Why? Political economics always moralizes because (i) it has no sound scientific foundation at all, and (ii), the little man only understands soap operas and morality plays.

The current stagings go as follows:
• Bad cop/foe/Orthodoxy: Debt is bad, you have sinned, you have yourself and your government allowed to spend beyond your means, you jeopardize the future of your children, your attitude is irresponsible, there is no such thing as a free lunch, now you have to pay, we all have to tighten our belts.
• Good cop/friend/Heterodoxy: Public debt is entirely different from private debt, it pays for itself, it creates income, it increases employment, it builds public infrastructure, it produces private financial wealth and triple-A financial assets for savers, ultimately we owe the public debt to ourselves, public deficit spending and inflation-free money creation for a growing economy are the same thing.

The little man is lost between these arguments because, taken one by one, each one makes good sense but on the whole, they contradict each other. Orthodoxy and Heterodoxy are irreconcilable. Obviously, the economic experts themselves cannot agree on what is true or false.

It is important for the little man to realize that there is NO such thing as an economic expert. Economics is a failed science and BOTH orthodox and heterodox economists have no idea how the profit- and price mechanism works. Contrary to their claim, economists are NOT scientists but merely political agenda pushers/useful idiots.

The absurdity of economics consists in the fact that economists themselves do not know which agenda they ultimately promote because the theories they cling to are all false. Neither Orthodoxy nor Heterodoxy has the true theory. Therefore, the economic policy guidance of BOTH orthodox and heterodox economists lack sound scientific foundations, BOTH are a hazard to their fellow citizens.

The discussion about austerity delivers the proof of the utter scientific incompetence of political economists. Neither Walrasianism, Keynesianism, Marxianism, nor Austrianism got the fundamental concept of economics, i.e. profit, right. To make the argument short, the correct profit equation for the economy as a whole is given as Qm≡Yd+(I-Sm)+(G-T)+(X-M) which reduces to Qm≡G-T for Yd, I, Sm, X, M = 0. The reduced macroeconomic profit equation says that the monetary profit of the business sector Qm is equal to the deficit G-T of the public sector.

So, from the standpoint of simple self-interest, the 1-percenters and their useful academic spokespersons should argue FOR deficit spending and the 99-percenters and their academic spokespersons should argue AGAINST it. Curiously, just the opposite happens since Adam Smith railed at public debt.

Fact is that the measured increase of the relation between profit and wage income in the past decades has no other cause than the increase of public and private deficit spending.#1

Because neither Orthodoxy nor Heterodoxy has the true profit theory their economic policy proposals are counter-productive or regressive for the social groups/classes they speak for. Fact is that nobody has done more for the 1-percenters than deficit spending heterodox economists who claim to ‘serve a progressive purpose’.#2

With regard to public deficit spending/public debt it is Heterodoxy who has taken the little man for a ride.#3

Egmont Kakarot-Handtke

#1Profit and the decline of labor’s nominal share
#2 Intellectual deficit spending' and 'Austerity and the idiocy of political economists' and 'MMT: The joy of public deficit spending' and 'MMT and the magical profit disappearance' and 'Who or what exactly did Keynes save?' and 'Keynesianism as ultimate profit machine' and 'Profit and the collective failure of economists'
#3 See also ‘Mass unemployment: The joint failure of orthodox and heterodox economics

Marx and the curious coexistence of provably false economic theories

Comment on Radhika Desai/counterpunch on ‘Marx’s “Capital” at 150: History in Capital, Capital in History’

Blog-Reference

There is no such thing as economics. There are TWO economixes: political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Economics consists of four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― which are mutually contradictory, axiomatically false, materially/formally inconsistent, and which got the foundational economic concept profit wrong. What we actually have is the peaceful coexistence of provably false theories. Pluralism, to recall, is a political ideal that does NOT apply to science. The goal of science is the one true theory.

Political economics is scientifically worthless and it does not matter at all whether it is right-wing or left-wing. Both, orthodox and heterodox economics has achieved NOTHING of scientific value in the last 200+ years.

The practical consequence of scientific failure is that economic policy guidance has NO sound scientific foundations since Adam Smith/Karl Marx. Political economics never had been more than poultry entrails reading and storytelling and agenda pushing.#1 Scientifically incompetent economists are the major cause of economic crises.

What is missing among economists of ALL political colors is (i) an idea what science is all about, and (ii), a commitment to the scientific standards of material and formal consistency. The lethal scientific blunder of Marx was to confound sociology/history/ political science and economics. To recall, Marx’s cardinal facts are:
• capital is a social relation,
• ownership of capital gives power analogous to state power,
• capitalist production is characterized by commodity fetishism, alienation, unfreedom,
• capitalism as a system is characterized by contradiction, competition, aggression, destruction, conflict, class war, Darwinian struggle, worldwide expansion,
• the capitalistic system is dysfunctional with recurring crises and a final big crunch.
All this is descriptively, commonsensically, and phenomenologically convincing as far as it relates to society.

Fact is, though, that Marx never understood how the economic system works, or more specifically, how the profit- and price mechanism works:
• he got profit, the foundational concept of all of economics, wrong,#2
• he did not realize that what appears as exploitation is, in fact, cross-over exploitation,#3
• he got the breakdown of the market system wrong.#4
• he failed to see that there are no ‘natural’ economic classes and that class war is a sociological construct.#3

What economists including Marxians do not get until this day is that economics is NOT a science of Human Nature or individual/social/political behavior but of the behavior of the monetary economy. Accordingly, the correct definition of the subject matter is objective/structural/systemic: “Economics is the science which studies how the monetary economy works.”

What Marx failed to understand is that economics is neither a social science nor a natural science but a system science. The scientific incompetence of Marxians consists in not having figured out until this very day what profit is.

Marxian economics is scientifically worthless since it came into being. This, it has in common with Walrasianism, Keynesianism, and Austrianism. All these approaches have no truth value but merely political use value. This is why this proto-scientific rubbish is still around.

Egmont Kakarot-Handtke

#1 The end of political economics
#2 Profit for Marxists
#3 The abject failure of orthodox and heterodox distribution theory
#4 Mathematical Proof of the Breakdown of Capitalism


Related 'Karl Marx, fake scientist' and 'Austerity and the total disconnect between economic policy and science' and 'Ricardian vice and Keynesian confusedness' and 'The Law of Economists’ Increasing Stupidity' and 'Why not simply throw all economists under the bus?'

August 25, 2017

Debunking MMT’s hallucinatory income-expenditure model

Comment on Peter Cooper on ‘Short & Simple 18 ― Income Determination in a Closed Economy’

Blog-Reference and Blog-Reference

Peter Cooper discusses income determination in a closed economy but, curiously, neither the word profit not distributed profit appears once in his article. But equilibrium appears which is known to be a NONENTITY. Hence the reality content of his standard MMT model is zero or even less.

In the following, a sketch of the formally and empirically correct price-, employment-, profit-, and income theory is given.#1 The most elementary version of the objective structural employment equation reads:
From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 means dissaving=credit expansion, a ratio rhoE less than 1 means saving. The expenditure ratio fully replaces the consumption function.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete AND testable employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’s arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does not work as the representative economist hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R. THIS is the key to full employment policy.

The correct profit equation reads Qm≡I-Sm. Legend: Qm monetary profit, I: investment expenditure, Sm monetary saving/dissaving. Business sector’s investment expenditures and household sector’s saving/dissaving are completely independent and NEVER equal.

The profit equation gets a bit longer when distributed profit import/export and government is included.

Note that overall profit and by consequence the income distribution has NOTHING to do with productivity or low wages or market power. These and other factors affect only the DISTRIBUTION of overall profit BETWEEN firms. What holds on the firms’ level does NOT hold for the economy as a WHOLE. Note also that Keynes, Marx, Kalecki, Keen, Minsky and other heterodox economists got profit PROVABLY wrong.#2

Keynes’s approach is macrofounded but incomplete because he had no deeper understanding of the profit and price mechanism. MMT builds on Keynes’s defective income and profit definitions and this yields, of course, a materially and formally inconsistent income-expenditure-equilibrium model.

Egmont Kakarot-Handtke

#1 For the comprehensive treatment see 'Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster'
#2 Heterodoxy, too, is scientific junk


For the full-spectrum refutation see cross-references MMT

Karl Marx, fake scientist

Comment on Jayati Ghosh on ‘150 years of ‘Das Kapital’: How relevant is Marx today?’

Blog-Reference and Blog-Reference

In the beginning, there was Political Economy. J. S. Mill defined it clearly as a social science: “The fundamental problem, therefore, of the social science, is to find the laws according to which any state of society produces the state which succeeds it and takes its place.” Or, a bit more specific with regard to economics: “The science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.”

Economics started as a hodgepodge of sociology, history, folk psychology, and folk philosophy (a mixture of utilitarianism, Hegelianism, Malthusianism/Darwinism, Individualism/Protestantism). The two issues ‘how society works’ and ‘how the economy works’ were never properly kept apart.

Since Adam Smith/Karl Marx economics defined itself as science. It was obvious, however, that the subject matter of what was the epitome of science, physics and mathematics, was qualitatively different from the so-called social sciences. With regard to the subject matter, there is no difference between Mill and Marx: “My stand-point, from which the evolution of the economic formation of society is viewed as a process of natural history, …” (Marx)

This is the exact point where things went wrong because history is storytelling: “That is why Descartes said that history was not a science ― because there were no general laws which could be applied to history.” (Berlin)

Science, in contradistinction, is ahistorical and universal because it looks for laws, or more generally, for invariances (Nozick), i.e. for that which does NOT change but remains invariant below the surface of phenomenological change. Marx understood this in principle: “That in their appearances things are often presented in an inverted way is something fairly familiar in every science, apart from political economy.” Fact is, though, that Marx never rose above the level of storytelling and agenda pushing, which is the definition of political economics. The goal of theoretical economics (= science) is the true theory with truth defined by material and formal consistency.

Economics always claimed to be a science but never rose above the level of a proto- or cargo cult science. Feynman defined it as follows: “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.”#1

What is missing among economists of ALL political colors is (i) an idea of what science is all about, and (ii), a commitment to the scientific standards of material and formal consistency. The lethal scientific blunder of Marx was to confound sociology and economics. This disqualifies him as a scientist. To recall, Marx’s cardinal facts are:
• capital is a social relation,
• ownership of capital gives power analogous to state power,
• capitalist production is characterized by commodity fetishism, alienation, unfreedom,
• capitalism as a system is characterized by contradiction, competition, aggression, destruction, conflict, class war, Darwinian struggle, worldwide expansion,
• the capitalistic system is dysfunctional with recurring crises and a final big crunch.
All this is descriptively, commonsensically, and phenomenologically convincing as far as it relates to society.

Fact is, though, that Marx never understood how the economic system works, or more specifically, how the profit- and price mechanism works:
• he got profit, the foundational concept of all of economics, wrong,#2
• he did not realize that what appears as exploitation is, in fact, cross-over exploitation,#3
• he got the breakdown of the market system wrong,#4
• he failed to see that there are no ‘natural’ economic classes and that class war is a sociological construct.#3
When the foundational concept of profit is false the whole analytical superstructure falls apart.

What economists including Marxians do not get until this day is that economics is NOT a science of Human Nature or individual/social/political behavior but of the behavior of the monetary economy.#5 Accordingly, the correct definition of the subject matter is objective/structural/systemic: “Economics is the science which studies how the monetary economy works.”

What Marx failed to understand is that economics is neither a social science nor a natural science but a system science. The scientific incompetence of Marxians consists in not having figured out until this very day what profit is.

Marxian economics is as scientifically worthless as it was 150 years ago.

Egmont Kakarot-Handtke

#1 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#2 Profit for Marxists
#3 The abject failure of orthodox and heterodox distribution theory
#4 Mathematical Proof of the Breakdown of Capitalism
#5 For details see cross-references Behavior


Related 'Marx and the curious coexistence of provably false economic theories' and 'Marx, the moron' and 'No exploitation, no classes'

August 23, 2017

MMT’s two shots in the head

Comment on Peter Cooper on ‘Short & Simple 17 ― A Notion of Macroeconomic Equilibrium’

Blog-Reference and Blog-Reference

MMT claims to be a new paradigm. It is NOT. A paradigm is defined by its foundational propositions and paradigm shift means, in methodological terms, to change the axiomatic foundations. Applied to economics, this requires to throw the provably false Walrasian microfoundations and the false Keynesian macrofoundations out of the window and to replace them with an entirely new axiom set.

MMT is NOT a new paradigm because it merely recombines Walrasian and Keynesian axioms that are known to be false.

(1) Walrasian Orthodoxy is defined by these 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)

The Walrasian hard core contains THREE NONENTITIES ― (HC2), (HC4), (HC5). To take equilibrium into the premises and then to establish the properties of general equilibrium is a methodological blunder that is known since antiquity as petitio principii.#1

Because equilibrium is a NONENTITY, all equilibrium models fly out of the window ― including MMT. There is NO such thing as a macroeconomic equilibrium.

(2) Keynesianism, too, is built upon false premises. The formal core of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment.” (p. 63)

Keynes’s lethal blunder is in the premise Income = value of output. The same blunder reappears in the textbooks since 1948: “GDP, or gross domestic product, can be measured in two different ways: (1) as the flow of final products, or (2) as the total costs or earnings of inputs producing output. Because profit is a residual, both approaches will yield exactly the same total GDP.” (Samuelson et al.) And finally, this blunder reappears in MMT: “Total Output = Total Spending.”#2, #3

Because the premises of MMT are false the WHOLE analytical superstructure is false, which means that MMT policy proposals have no sound scientific foundations. The proponents of MMT ― Cooper, Hickey, Mosler, Wray, Mitchell, Fullwiler, Kelton, Forstater, and so on ― are scientifically incompetent. MMT is soapbox economics.#4

Egmont Kakarot-Handtke

#1 'There is NO such thing as supply-demand-equilibrium' and 'Essentials of Constructive Heterodoxy: The Market' and 'Ground Control to David Glasner' and 'Petitio principii — economists’ biggest methodological mistake' and 'Why you should NEVER use supply-demand-equilibrium' and 'Traditional Heterodoxy’s paradigmatic impotence' and 'All models are false because all economists are stupid' and 'The Law of Supply and Demand: Here It Is Finally' and 'How to Get Rid of Supply-Demand-Equilibrium
#2 Peter Cooper, Short & Simple 17
#3 For the full-spectrum refutation of MMT see cross-references
#4 MMT is NOT an alternative to neoliberalism


Related 'Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother' and '10 steps to leave cargo cult economics behind for good' and 'The profit effect of a Job Guarantee'

***
REPLY to Tom Hickey on Aug 24

The topic of this thread is NOT scarcity or surplus or subsistence. Peter Cooper presents in Short & Simple 17 two vital elements of the MMT approach: macroeconomic equilibrium and the national accounting identity Y = C + I + G + X – M.

The proof has been given
(i) that equilibrium is a NONENTITY, that is, there is NO such thing as a microeconomic or macroeconomic equilibrium.#1 ALL equilibrium models are false.
(ii) that the national accounting identity is false.#2

Key insight: the MMT approach is proto-scientific rubbish.#3

#1 There is NO such thing as supply-demand-equilibrium
#2 A tale of three accountants
#3 Cross-references Refutation of MMT

***
REPLY  Tom Hickey on Aug 24

You say: “If there is truly a general surplus then prices should fall across the board to an equilibrium level where all resources are employed and there is no longer a surplus.”

These are the old delusional slogans from Econ 101 and they demonstrate an utter lack of understanding how the economy and the labor market in particular works.

The elementary version of the correct (objective, systemic, behavior-free, macrofounded) employment equation is shown on Wikimedia:
From this equation follows inter alia:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

Item (i) and (ii) cover the familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. It works such that overall employment L INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.#1, #2

Your statement “prices should fall across the board to an equilibrium level where all resources are employed” is Neanderthal economics. Just the opposite holds for the aggregate labor market. And, by the way, there is NO such thing as a micro or macro equilibrium in economics. Equilibrium is a NONENTITY.

#1 For details see cross-references Employment
#2 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

August 22, 2017

The abject failure of orthodox and heterodox distribution theory

Comment on Lars Syll on ‘Trading in Myths’

Blog-Reference and Blog-Reference on Aug 30

For most people economics is a story about wealth and riches, the conflicts between capitalists and workers, the fraud and deception of the corrupt one-percenters and the hardships of the honest and exploited/alienated 99-percenters. This is the soap opera view of economics.

The scientific view is not focused on the human drama/farce/myth but on the functioning of the economic system as a whole. Economics leaves all questions about Human Nature/ motives/behavior/action to psychology, sociology, anthropology, history, political science, biology, etcetera.#1, #2

Because NO way leads from the explanation of Human Nature/motives/behavior/action to the explanation of how the economic system works all behavioral approaches have failed. The actual state of economics is this: Walrasianism, Keynesianism, Marxianism, Austrianism are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong. Fact is that the Walrasian approach = microfoundations and the Keynesian approach = macrofoundations have already been dead in the cradle.

Therefore, economics has to undergo a paradigm shift. Economic analysis has to be based on entirely new macrofoundations and the fundamental questions have to be put again at the top of the agenda and answered with the help of better analytical tools. The key concepts of classical economics were profit, capital, exploitation, and classes. So let us, first of all, revisit profit.

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.#3

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 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.#4

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 Profit Law.

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 of 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 by the productivity.

Now, the business sector is split into two identical firms and firm 1 is supposed to cut the wage rate W1 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.

However, this situation cannot last for long if profit has been zero in the initial period. In this limiting case, firm 2 makes a loss which is exactly equal to firm 1’s profit. The arbitrary wage rate cut of firm 1 does NOT increase the profit for the business sector as a WHOLE but only REDISTRIBUTES it between the firms.

Seen from the perspective of a single firm, the antagonism of wages and profits is 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, i.e. Qm=0, and the same is true for the household sector as a WHOLE, i.e. X=O and W/P=R. 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.

For the economy as a whole, the classical antagonism of wages and profits is an optical illusion. This has a bearing on the POLITICAL notion of classes. There is NO distributional conflict about output between profits and wages. When classes are defined according to these economic categories the actual conflict materializes WITHIN the classes.

When, in the limiting case, there are two groups of workers and two groups of capitalists and the first group of capitalists exploits the first group of workers by slashing the wage rate, then the exploiters OBJECTIVELY act in the interest of the second group of workers whatever their own subjective motives may be. The second group of workers has no economic interest to overcome the wage discrimination of the first group, yet the second group of capitalists has indeed because its profit is indirectly affected. On a deeper level, the relation between the two groups of capitalists is antagonistic. The same holds for the two groups of workers. What looks like exploitation is, in fact, CROSS-OVER EXPLOITATION WITHIN the Marxian classes. This explodes the idea of a ‘natural’ common class interest and, by consequence, of a ‘natural’ class war.

The myopic agents, workers and capitalists alike, are blind to the interdependencies of cross-over exploitation and therefore prone to the Fallacy of Composition. The generalization of partial effects has the compelling logic of the profit and loss account and the irrefutable empirical evidence of firm 1 on its side. Indeed, what could be more convincing? Wages down, profits up, it works. The INVISIBLE redistribution of profit and output is anonymously effected behind the agents’ backs by the market clearing price. Neither capitalists nor workers understand how the market system works. Neither do economists since Smith, Ricardo,#5 and Marx.#3 Neither does Lars Syll.

Because the profit theory is false since Adam Smith, both orthodox and heterodox distribution theories are false until this very day. There is no such thing as good heterodox guys and bad orthodox guys or vice versa; economists ― ALL of them ― have to be expelled from the sciences.

Egmont Kakarot-Handtke

#1 Economics is NOT about Human Nature but the economic system
#2 Economics is NOT a social science
#3 For details see ‘Profit for Marxists
#4 Wikimedia, Pure production-consumption economy
#5 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism


Related 'No exploitation, no classes'

***
REPLY to Yoshinori Shiozawa on Sep 6

You say: “His axiomatic system is a set of statistical concepts by which to describe what happened in the past. There is no observation or arguments on laws of economics, i.e. on how economic system works.”

This is false. The axioms refer to one period and the periods are seamlessly interconnected.#1. The four basic laws are listed on Wikimedia.#2

You say: “His starting point in construction his economics is pure consumption economy. He is wrong to start from consumption economy, because it only leads to pure exchange economy.”

This is false. What I call the pure consumption economy is the same thing which Keynes meant with “monetary theory of production”. The pure consumption economy is ANALYTICALLY PRIOR to the more complex investment economy. It should perhaps more precisely be called the pure production-consumption economy.

You say: “He is based on a wrong dichotomy of micro and macro and seeks macrofoundations. He is not aware that there are cyclic causal relations between the whole structure and processes and people’s behaviors as a result of evolution in this macro structure and processes.”

This is false. Macrofoundations are the correct axiomatic starting point.#3 Given the macro axioms, which refer explicitly to ONE giant firm, one has to proceed top-down by successive DIFFERENTIATION until one arrives at the individual agent. Differentiation is the OPPOSITE of bottom-up or aggregation. It is microfoundations and bottom-up that is the defining idiocy of Walrasianism, which literally produces the aggregation problem.

There is NO dichotomy: Walrasian microfoundations have to be FULLY REPLACED by the correct macrofoundations.#4

#1 The Synthesis of Economic Law, Evolution, and History
#2 Econ Starter Kit: First Economic Law, Law of Supply and Demand, Profit Law, Employment Law
#3 First Lecture in New Economic Thinking
#4 Economic methodology for the little man

August 21, 2017

Economics: a hereditary mental disease with scientific incompetence as father and political fraud as mother

Comment on Bill Mitchell on ‘When neo-liberal masquerades as anti-establishment’

Blog-Reference and Blog-Reference

There is the political sphere and there is the scientific sphere. It is quite obvious that both are fundamentally different and because of this, it is of utmost importance to radically separate the two. The mixing of the two is the hereditary mental disease of economics.

Politics is about the realization of the good society. This presupposes an idea what the good society is and the practical capacity to make things happen. In very general terms, the political sphere is about values and action, and the crucial distinction is between good/bad or better/worse. Science is about knowledge and the crucial distinction is between true/false with truth unequivocally defined by material and formal consistency.

That much is clear after more than 200 years: economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and ALL got the foundational concept of the subject matter ― profit ― wrong.

So, this is the situation: economists dabble in politics where they have, to begin with, NO legitimate business. Worse, economists’ policy guidance has NO sound scientific foundations at all. This starts with Adam Smith/Karl Marx and ends with current orthodox and heterodox economics. MMT is NO exception.

Political economics is not only cargo cult science but ― intentionally or unintentionally does not matter ― political fraud: “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 are supposed to deliver knowledge (= episteme) but produce since 200+ years scientifically worthless political opinion (= doxa). To sell opinion under the label of science is fraud.

MMT is a case in point. Bill Mitchell criticizes mainstream economics in its incarnation of New Zealand’s TOP party. All his arguments are accurate, except when it comes to the theoretical underpinning of MMT policy proposals.

Bill Mitchell claims: “… MMT is a lens which allows us to see the true (intrinsic) workings of the fiat monetary system. It helps us better understand the choices available to a currency-issuing government. It is not a regime but a perspective on reality. … In that sense, MMT is neither right-wing nor left-wing.”

MMT claims to be objective scientific truth. Fact is that it is proto-scientific rubbish, qualitatively not at all different from orthodox economics. MMT’s profit/employment/ money theory is provably false. In methodological terms, MMT is NOT a valid new paradigm because its axiomatic foundations are false just like Walrasian microfoundations and Keynesian macrofoundations are materially/formally inconsistent.

One example. Bill Mitchell claims: “Third, it is 100% correct to say that if the government runs a fiscal surplus then it condemns the non-government sector to run a deficit (spending more than its income) as a matter of accounting, dollar for dollar.”

No, this is NOT 100% correct. This is misleading, to say the least. The correct accounting truth is this. There is no such thing as a non-government sector, to begin with, only a business sector and a household sector. So, if the household sector chooses its saving/dissaving in a given period then a government deficit/surplus “condemns” the business sector to profit/loss.

These are the correct accounting identities:
Qm≡C+G-Yw     profit/loss Qm, business sector,
Sm≡Yw-T-C       saving/dissaving Sm, household sector,
Bm≡T-G            budget surplus/deficit Bm, government sector,
Qm+Sm+Bm=0.

For THREE sectors, proper accounting yields THREE sectoral balances which add up to zero. The question is, why makes MMT profit disappear by creating an artificial sector called non-government sector? In other words, why is MMT cooking the books? There is NO scientific justification, so it must be some political reason.*

MMT is NOT a new scientific paradigm but old political crap in a new scientific bluff package. This holds for ALL of economics: when profit is false the whole theoretical superstructure is false and economic policy guidance has NO sound scientific foundation.

Egmont Kakarot-Handtke

* For more details see ‘MMT and the magical profit disappearance’ and cross-references MMT


Related 'MMT is NOT an alternative to neoliberalism'

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REPLY to wilwon32 on Aug 22

(i) You ask: “Am I the only one who sees little value in attempting to infer some special significance in E K-H’s profit argument.”

Yes, you are the only one left who does not understand that profit is the core concept of economics.

(ii) You maintain: “I thought that the advancement of economic understanding provided by MMT related to the special character of national sovereignty …”

Sovereignty is the core concept of political science. The legitimate national sovereign decides every political question. This is NOT a new insight of MMT but a tautological paraphrase of what sovereignty means.

Economics is NOT about how the political system works but about how the economic system works. Economics is a science and the subject matter is “the economy” in the abstract and the universal properties of a monetary economy and ― as a matter of principle ― NOT so much the accidental specifics of any national economy. Laypersons, of course, have a quite narrow perspective and are mainly interested in what happens in their backyard and who pays for the wall. Because of this, they cannot see that there are two economixes: political economics (= agenda pushing) and theoretical economics (= science).

Politics and science do not fit together and have to be kept strictly apart. This is known since the founding fathers: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (J. S. Mill)

As a rule of thumb, it can be said that every economist who dabbles in politics is NOT a competent scientist but a brainless blatherer who masquerades as scientist. It does not matter whether the blather is right-wing or left-wing.

(iii) You say: “It seems as if one could also develop a argument for the importance of DEBT in economic arguments …”

Obviously, you do not understand the Profit Law, Qm=-Sm, which says explicitly that the business sector’s profit/loss is equal to the change of the household sector’s debt. Profit and debt are the two sides of the SAME coin.

(iv) The trouble with you, Bill Mitchell, and the rest of the MMT crowd is that you suffer from a complete lack of understanding of how the profit- and price mechanism works. This is not so terribly bad because although stupidity is the criterion for exclusion in science it is at the same time the criterion for admission in politics. So, there stands nothing in the way of a clear-cut separation of science and politics. All, you, Bill Mitchell, and the rest of the MMT crowd have to do is to leave economics ― it is as simple as that.

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REPLY to ANC Driver on Aug 23

You sum up: “there is no way we can all be solvent all at the same time. To prove this scientifically … is one thing, but it still leaves us with the ill-feeling of ‘what the hell am I supposed to do about this?’”

This, exactly, is the significance of profit theory.

The Profit Law in its most elementary form says Qm=-Sm or monetary profit for the economy as a whole has nothing to do with greed or monopoly power or innovation or productivity but is the mirror image of dissaving. In other words, in the pure production-consumption economy profit depends in the most elementary case on the growth of the household sector’s debt.

Now, only if profit is greater than zero the business sector maintains or increases employment. This is the minimum condition. If overall profit turns into loss firms go bust and employment decreases. If the losses continue the economy eventually breaks down.

From the fact that profit is the mirror image of growing household sector’s debt follows logically that overall profit turns into overall loss as soon as the household sector starts to pay back the accumulated debt. Hence, the economy eventually breaks down because of immanent logical necessity (no crisis and no criminals and no banksters and no exploding real estate or stock market bubble is needed) as soon as private and/or public households start to redeem their debt in the aggregate (i.e. new credit, rollovers, and redemption netted out).#1

The Profit Law for the investment economy says Qm≡I-Sm or monetary profit for the economy as a whole is given by the difference between business sector’s investment I and household sector’s monetary saving/dissaving Sm. Let Sm for simplicity here be zero then profit depends directly on the GROWTH of the capital stock.#2

This worked fine since the Industrial Revolution but it cannot work in all eternity. The snag is this: if growth weakens or is stopped overall profit turns into overall loss and the whole economy breaks down. The situation is analogous to that of a car driver who cannot slow down because if he jams on the brakes the car explodes.

The challenge as it follows from the correct profit theory is this: how can the growth path be flattened or even reversed without causing a full-scale economic breakdown?

Because Walrasians, Keynesians+MMTers, Marxians, and Austrians have NO idea until this day what profit is they do not even see that the actual life-and-death question of economics is how to engineer a soft landing on a reasonably high plateau. All the rest of economics is sitcom blather.

#1 Mathematical Proof of the Breakdown of Capitalism
#2 Squaring the Investment Cycle

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REPLY to ANC Driver on Aug 24

You say: “What I would love is for someone like you, who obviously can see things how they actually are (i.e. 100% solvency is not possible), is to channel your knowledge into helping people like me and others to find a way to use this knowledge to get some people away from the solvency game altogether.”

The task of the economist qua scientist is to figure out how the actual economy works. This is comparable to the task of a physicist/engineer to figure out how a heavy piece of metal can get off the ground, travel great distances at high altitudes, and arrive safely and in time at some far away place. The physicist/engineer does NOT care who is on board of the craft which he is designing/constructing and whether these folks are happy, drunk or vomiting.

If you are in an identity crisis and need psychological or philosophical help do NOT go to an economics blog but google a self-help group in your neighborhood.

People who claim that they save the world, work for the welfare of humankind, promote liberty and democracy, make you rich and happy, and help the little man to have a better life are NOT economists who are committed to well-defined scientific standards.

No scientist ever raises peoples’ hopes/expectations, only presidential candidates, political parties, and MMTers do.