September 30, 2015

Exponentially growing junk

Comment on Asad Zaman on ‘Capitalism in the 21st Century’


You ask: “Why is there so much inequality, and why does it continue to rise? Piketty’s answer is brilliantly simple: r > g. The ‘r’ is the rate of return to wealth. This is the profit that the wealthy can make when they invest. The ‘g’ is the growth rate of the economy, currently around 3.3 per cent, globally.” (See intro)

Did it ever occur to you that this argument has the same logical structure as Malthus's, that is, if population grows faster than food production eventually some people will die of hunger? Likewise, the Club of Rome famously argued, if depletion of a resource runs faster than its natural renewal humanity eventually looks into an empty barrel.

Clearly, the logic of positive/negative growth rates, of which compound interest is only the simplest case, is impeccable. Ultimately, it is a suggestive tautology that explains nothing. This holds also for Piketty’s r > g.

The trivial content of the diverging growth rates argument is that the whole thing ends up either at 0 or 100 percent, depending on whether the net growth rate is negative or positive. This is an easy mathematical exercise and not an economic theory.

For an explanation of growing wealth inequality one first of all needs an understanding of what profit and interest is and how they interact in the monetary economy (2011). The fact of the matter is that neither Orthodoxy nor Heterodoxy has this understanding because the profit theory, and by consequence distribution theory as a whole, is false since Adam Smith (2014b). Piketty is no exception.

Then you ask “A more important question for us to consider ... HOW can we, as heterodox economists — be instrumental in bringing about positive change?”

The answer depends on whether Heterodoxy is defined as political or scientific enterprise. The consequence is pretty obvious: in the first case one has to take political action, in the second case the action consists in the overdue paradigm shift, that is, economic theory has to be reconstructed from the ground up (2014a). Kuhn famously described this as scientific revolution and it is well known since Bacon how the interaction of facts and axioms works.

“There remains simple experience; which, if taken as it comes, is called accident, if sought for, experiment. The true method of experience first lights the candle [hypothesis], and then by means of the candle shows the way [arranges and delimits the experiment]; commencing as it does with experience duly ordered and digested, not bungling or erratic, and from it deducing axioms [theories], and from established axioms again new experiments.” (Novum Organum, 1620; quoted in Wikipedia)

Economists have always mashed up politics and science. The result has been exponentially growing scientific junk. Until this day the representative economist cannot tell the difference between profit and income. Because of this, not much more than confused blather can ever be expected from economists.

So ‘how can economists be instrumental in bringing about positive change?’ What about getting out of economics for good?

Egmont Kakarot-Handtke

Kakarot-Handtke, E. (2011). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2014a). Objective Principles of Economics. SSRN Working Paper Series, 2418851: 1–19. URL
Kakarot-Handtke, E. (2014b). The Profit Theory is False Since Adam Smith. What About the True Distribution Theory? SSRN Working Paper Series, 2511741: 1–23. URL

For details of the big picture see cross-references Incompetence.