March 27, 2018

The curious non-existence of profit in economics

Comment on Brian Romanchuk on “The Curious Household Accounting Of DSGE Models”

Blog-Reference and Blog-Reference

Paul Krugman once put it in a nutshell: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Paul Krugman, of course, is an idiot. But he is not the only one, just the opposite, he is the mouthpiece of the stupid majority. To this basket of deplorables belong also Lars Ljungqvist, Thomas Sargent, the rest of DSGEers, Brian Romanchuk, Roger Sparks, Nick Rowe, and the rest of tireless nonsense bloggers.

What unites these folks is scientific incompetence, more specifically, the inability to realize that maximization-and-equilibrium has always been and will always be a methodologically inadmissible starting point. To recall, these are the verbalized neo-Walrasian axioms:
HC1 There exist economic agents.
HC2 Agents have preferences over outcomes.
HC3 Agents independently optimize subject to constraints.
HC4 Choices are made in interrelated markets.
HC5 Agents have full relevant knowledge.
HC6 Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states. (Weintraub)

These premises contain three plain NONENTITIES (constrained optimization, rational expectations, equilibrium) and therefore are forever unacceptable. Being incompetent scientists, though, most economists swallowed this inane stuff hook, line, and sinker from Jevons/Walras/Menger onward to DSGE.

Every theory/model that contains just one NONENTITY is scientifically worthless.

What has to be realized in addition is that false premises require a pigtail of false auxiliary assumptions. So, in order to be applicable, constrained optimization requires the auxiliary assumption of a production function with decreasing returns. Thus, a silly behavioral assumption determines the physical properties of production in the upside-down world of standard economics.

One auxiliary assumption that is clearly at odds with reality is zero-profit.

“The zero profit attributed to perfect competition does not arise from perfect competition at all, but merely from the assumption that aggregate profit is zero.” (Murad)

“… since it is impossible to have an economy where everyone is making profits. Aggregate profit for an entire (closed) economy must be zero, hence if any firm is making profits, some other firm must be making losses.” (Boland)

“Wherever entrepreneurs make profits … they expand production; wherever they incur losses, production is contracted. In equilibrium, therefore, there are neither profits nor losses. Walras thus created the abstraction of the zero-profit entrepreneur under perfect competition.” (Niehans)

“Profit theory has long been regarded as one of the more unsatisfactory branches of economics. . . . One reason for this is that economists have not asked the right questions about profit.” (Murad)

In fact, economists do not understand since 200+ years what profit is.#1 This includes Walrasians, Keynesians, Marxians, Austrians, Pluralists, DSGEers, MMTers and, last but not least, Brian Romanchuk.

Lars Ljungqvist’s and Thomas Sargent’s DSGE is proto-scientific garbage. Nobody with more than two brain cells needs three lengthy posts to arrive at this conclusion.

Egmont Kakarot-Handtke

#1 For details see cross-references Profit


NOTE on Brian Romanchuk's 'The Curious Notation Of DSGE Models' on Mar 29 and Blog-Reference MNE

You announced a tripartite analysis of an elementary DSGE model and after part 2 you suddenly realize that the notation of DSGE models is “curious”. This tells everyone that you have not understood from the very beginning what you are talking about.

At the end of your second post, I summed up: “Lars Ljungqvist’s and Thomas Sargent’s DSGE is proto-scientific garbage. Nobody with more than two brain cells needs three lengthy posts to arrive at this conclusion.”

Your analysis and critique of DSGE is a pointless exercise. Everybody knows by now that the microfoundations approach is dead. Standard economics is dead. DSGE is dead.

Economics needs a Paradigm Shift because the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are axiomatically false and materially/ formally inconsistent.

Endless recycling of long-dead theories/models is not science.

Economics is what Feynman called a cargo cult science, economists are failed/fake scientists, the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel is a deception of the public.  Economics is one of the worst cases of theory failure in the history of modern science ― and you are part of it.

Wikimedia AXEC106h