Profit

Own post, no external Blog-Reference, Wikipedia submission Jun 17*, draft formatting

Profit (axiomatic economics)

Mainstream profit theory is microfounded. This is a lethal methodological blunder. Because profit – the foundational concept of economics – is ill-defined the whole analytical superstructure is scientifically worthless. As a consequence, economic policy guidance has never had sound foundations. This applies to left/center/right economic policy. More generally, this applies to political economy from the founding fathers to this day: “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)^[1] To overcome the pluralism of provably false approaches a paradigm shift is imperative. The shift consists of moving from microfoundations to macrofoundations.

Macrofoundations

The rule to follow has been known for 2300+ 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, Posterior Analytics)

This is the methodologically correct starter set of economic premises

(A0) The objectively given and most elementary systemic configuration of the economy consists of the household sector and the business sector which in turn consists initially of one giant fully integrated firm. It holds in simplified notation

(A1) ${\displaystyle Y_{W}=WL}$ wage income ${\displaystyle Y_{W}}$ is equal to wage rate ${\displaystyle W}$ times working hours ${\displaystyle L}$,

(A2) ${\displaystyle O=RL}$ output ${\displaystyle O}$ is equal to productivity ${\displaystyle R}$ times working hours ${\displaystyle L}$,

(A3) ${\displaystyle E_{C}=PX}$ consumption expenditures ${\displaystyle E_{C}}$ are equal to price ${\displaystyle P}$ times quantity bought/sold ${\displaystyle X}$.

These macroeconomic axioms are certain, true, and primary, and therefore satisfy all methodological requirements. The starter set is minimalist, that is, Occam’s razor has been applied and the axiom set cannot be reduced further, only expanded. The set is objective-structural and composed of measurable variables which is of obvious importance for the eventual state-of-the-art testing of the conclusions that are consistently derived from the premises. In every scientific domain, the axiom set constitutes the universe of discourse.^[2]

For a start, the following conditions are added to the premises

(C1) ${\displaystyle X=O}$ market clearing, i.e. the quantity bought/sold ${\displaystyle X}$ is equal to the quantity produced ${\displaystyle O}$.

(C2) ${\displaystyle E_{C}=Y_{W}}$ budget balancing, i.e. consumption expenditures of the household sector ${\displaystyle E_{C}}$ are equal to wage income ${\displaystyle Y_{W}}$.

Figure 1 Elementary production-consumption economy as graphical representation of the macroeconomic axioms and conditions

The graphical representation of the elementary production-consumption economy is given with the 4-quadrant chart of Figure 1.

Profit/loss and dissaving/saving

Now, the definitions of monetary saving and monetary profit are added. The sectoral balance of the household sector, i.e. monetary saving/dissaving, is defined as

$${\displaystyle S_{m}\equiv Y_{W}-E_{C}\qquad (1)}$$

The right-hand side of the symbol/operator ${\displaystyle \equiv }$, i.e. the definiens, contains variables that have been introduced with the axioms. On the left-hand side stands the derived variable, i.e. the definiendum, which is consistently connected to the original variables of the axiom set. To establish formal consistency is one half of the task “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)^[3]

The sectoral balance of the business sector, i.e. monetary profit/loss, is defined as

$${\displaystyle Q_{m}\equiv E_{C}-Y_{W}\qquad (2)}$$

${\displaystyle Q_{m}>0}$ is called profit, ${\displaystyle Q_{m}<0}$ is called loss. Budget balancing implies a macroeconomic profit of zero. Nonmonetary profit ${\displaystyle Q_{n}}$ is not dealt with here.^[4]

Figure 2 Complementarity of the sectoral balances, i.e. of business sector's loss and household sector's saving. Alternatively, business sector's profit and household sector's dissaving/deficit spending

The sectoral balances are complementary

$${\displaystyle Q_{m}\equiv -S_{m}\qquad (3)}$$

At the heart of the monetary economy is an identity: the business sector's nominal surplus, i.e. profit, equals the household sector's nominal deficit, i.e. dissaving. And vice versa, the business sector's deficit, i.e. loss, equals the household sector's surplus, i.e. saving. This is the most elementary form of the macroeconomic profit law. The elementary accounting relationships are shown in Figure 2.

Another way of stating the complementarity of the sectoral balances is to add the balances up

$${\displaystyle Q_{m}+S_{m}\doteq 0\qquad (4)}$$

The sectoral balances add up to zero. The symbol/operator ${\displaystyle \doteq }$ means 'true by definition'. This is an implicit formal feature of microeconomic and macroeconomic accounting.

So, where does profit ${\displaystyle Q_{m}}$ ultimately come from? Macroeconomic profit is not made from a longer labor time ${\displaystyle L}$, not from higher productivity ${\displaystyle R}$, not from innovation/creative destruction, not from a lower wage rate ${\displaystyle W}$, not from more greed, not from exploitation, not from monopoly power, not from risk-taking, not from rent-seeking, not from wishful thinking or any other subjective factor, but in the most elementary case of the production-consumption economy from the dissaving/deficit spending of the household sector. Starting with a balanced-budget economy, macroeconomic profit presupposes credit/money creation by the banking sector (central bank and commercial banks).

Accordingly, microeconomic profit is the result of the continuous redistribution of macroeconomic profit between the firms that constitute the business sector. If macroeconomic profit is zero, i.e. if the household sector's budget is balanced, then the sum of microeconomic profits is equal to the sum of microeconomic losses. This, clearly, is an analytical limiting case. What can be observed is that macroeconomic profit has since the Industrial Revolution been most of the time greater than zero.

Major extensions

The macroeconomic profit law reads with increasing complexity

(i) ${\displaystyle Q_{m}\equiv -S_{m}}$ in the elementary production-consumption economy,

(ii) ${\displaystyle Q_{m}\equiv Y_{D}-S_{m}}$ in the production-consumption economy with distributed profit ${\displaystyle Y_{D}}$,

(iii) ${\displaystyle Q_{m}\equiv I-S_{m}}$ in the elementary investment economy with investment expenditures I,

(iv) ${\displaystyle Q_{m}\equiv Y_{D}+I-S_{m}}$ in the investment economy with profit distribution,

(v) ${\displaystyle Q_{m}\equiv (G-T)+(I-S_{m})}$ in the investment economy with government deficit ${\displaystyle G>T}$ or surplus ${\displaystyle G<T}$, Legend: ${\displaystyle G}$ government spending, ${\displaystyle T}$ taxes,

(vi) ${\displaystyle Q_{m}\equiv (EX-IM)+(G-T)+(I-S_{m})+Y_{D}}$ in the open economy with distributed profit, Legend: ${\displaystyle EX}$ export, ${\displaystyle IM}$ import.

Scientific blunder from Keynes to MMT[edit]

Keynes defined the formal core of his General Theory^[5][6] on p. 63 as follows “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.”

This syllogism is defective because Keynes never came 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.)^[7]

The economist Keynes had no idea of the fundamental concepts of economics, viz. profit and income. Because profit is ill-defined, the whole theoretical superstructure of Keynesianism is false, in particular, all I=S/IS-LM models. Neither pro- nor anti-Keynesians spotted the elementary mathematical defect in Keynes' macrofoundations to this day.^[8] This amounts to scientific self-disqualification.^[9] Because of formal inconsistency, Keynesianism has to be excluded from the sciences.

Complexity level (iii) of the macro-axiomatic profit law, i.e. ${\displaystyle Q_{m}\equiv I-S_{m}}$, says that in the elementary investment economy business sector investment ${\displaystyle I}$ is never equal to household sector saving ${\displaystyle S_{m}}$ and that their difference is macroeconomic profit/loss ${\displaystyle Q_{m}}$.

Keynes wrecked the paradigm shift  from microfoundations to macrofoundations.^[10] The Keynesian Revolution has been a scientific failure from the very beginning.

From Equation (v) follows the profit law for the basic three-sector economy (household, business, state) without investment as

$${\displaystyle Q_{m}\equiv \left(G-T\right)-S_{m}\qquad (5)}$$

which says that the business sector's profit/loss is given by the state sector's budget deficit/surplus and the household sector's dissaving/saving. For ${\displaystyle S_{m}=0}$ this boils down to ${\displaystyle (G-T)\doteq Q_{m}}$, i.e. public deficit equals private profit. The profit of the monetary economy is in this analytical limiting case produced entirely by the state. This case is at odds with the popular ideas of a free market economy and Laissez-faire but it is practically the new normal.

The business sector's profit is zero if the state sector's deficit is equal to the household sector's saving. If the budget deficit is greater than saving, then macroeconomic profit is greater than zero, otherwise, the business sector makes a loss. This is not a reproducible situation. The monetary economy breaks down – at the latest – when macroeconomic profit ${\displaystyle Q_{m}}$ turns negative. This does not happen as long as the household sector and the state sector combined run a net deficit.

The profit law holds for the monetary economy as given by the macroeconomic axiom set, that is, for Capitalism and Communism and everything in-between. Macroeconomic profit does not depend on the ownership of the means of production.

The government's policy of deficit spending/money creation clearly benefits the business sector because it increases macroeconomic profit according to the profit law which entails Public deficit ${\displaystyle \doteq }$ Private profit. Thus, private financial wealth and public debt grow in lockstep.

MMTers obfuscate the relationship between public deficit spending and macroeconomic profit by rearranging and redefining Equation (5) as follows

$${\displaystyle \left(Q_{m}+S_{m}\right)=\left(G-T\right)\qquad (6)}$$

i.e. by asserting that “private saving” ${\displaystyle \left(Q_{m}+S_{m}\right)}$ is equal to the public deficit ${\displaystyle (G-T)}$.^[11] Thus, the logical directionality between the sectoral balances that is formally embodied in the one-way operator ${\displaystyle \equiv }$ is by sleight of hand changed to the two-way operator ${\displaystyle =}$, and macroeconomic profit ${\displaystyle Q_{m}}$ vanishes entirely from view through the redundant definition of “private saving”. As a consequence of this mathematically/semanticallyincorrect operation, it is no longer apparent that the state sector's deficit spending is to the advantage of the ten-percenters and to the disadvantage of the ninety-percenters. In real terms, deficit spending amounts to stealth taxation of the household sector.^[12] In addition, the interest on public debt will be taxed and redistributed within the household sector from the ninety-percenters to the ten-percenters as long as the public debt is rolled over. This can be a very long time. The distributional consequences of public deficit spending/money creation are enormous.

How long private/public debt can grow, i.e. how long the turn from profit to loss – and by consequence, the breakdown of the economy – can be postponed, is an open question. The monetary economy lives on borrowed time, there is no such thing as an economic equilibrium.

Reset

The inevitable failure of economics started with Jevons/Walras/Menger but Arrow^[13] gave the final push with this methodological dictate: “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.”

Old definition, subjective-behavioral, microfoundations: Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. (Robbins)

New definition, objective-systemic, macrofoundations: Economics is the science that studies how the monetary economy works.

Takeaway

All microfounded profit theories are provably false.

Keynesianism is macrofounded but Keynes' macrofoundations are not correctly specified.

The major approaches — Walrasianism, Keynesianism, Marxianism, Austrianism, MMT, Pluralism — are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept of profit wrong. For 200+ years now, economics is a cargo cult science: “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.” (Feynman)

This holds also for Wikipedia entries that refer to the subject matter of economics and that are not based on consistent macrofoundations. With regard to economics, academic scholarship and peer-reviewed publications do not satisfy the criteria of reliable sources for a scientific encyclopedia that is seriously committed to episteme in the original meaning as the opposite of doxa.

If it isn't macro-axiomatized, it isn't economics.

References

1. ^ Stigum, Bernd (1991). Toward a Formal Science of Economics: The Axiomatic Method in Economics and Econometrics. Cambridge: MIT Press. p. 30.
2. ^ Kakarot-Handtke, Egmont (2020). Sovereign Economics. Norderstedt: BoD (forthcoming**). pp. 1–26. ISBN 978-3-7519-4649-0.
3. ^ Klant, Joop (1994). The Nature of Economic Thought. Aldershot: Edward Elgar. p. 31.
4. ^ See Chapter 7 of 2
5. ^ Keynes, John Maynard (2018). "The General Theory of Employment, Interest, and Money". doi:10.1007/978-3-319-70344-2.
6. ^ Keynes, John Maynard (2019-10-05). The General Theory of Employment, Interest, and Money. Google Books: GENERAL PRESS. ISBN 978-93-89440-62-1.
7. ^ Tomasson, Gunnar; Bezemer, Dirk J. (2010-01-29). "What is the Source of Profit and Interest? A Classical Conundrum Reconsidered". mpra.ub.uni-muenchen.de. Retrieved 2020-06-16.
8. ^ Kakarot-Handtke, Egmont (2011-11-30). "Why Post Keynesianism Is Not Yet a Science". Rochester, NY.
9. ^ Popper, Karl (1963). Conjectures and Refutations. London: Routledge and Kegan Paul.
10. ^ Kakarot-Handtke, Egmont (2011-05-14). "Keynes's Missing Axioms". Rochester, NY.
11. ^ "MMT: cross-references". AXEC. 2015-11-30. Retrieved 2020-06-16.
12. ^ See Chapter 6 of 2
13. ^ Arrow, Kenneth J. (1994). "Methodological Individualism and Social Knowledge". The American Economic Review. 84 (2): 1–9. ISSN 0002-8282.

Categories:

• AfC submissions by date/17 June 2020

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* Wikipedia User_talk Jun 17

Source: User_talk Wikipedia

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** Publication Books on Demand Jun 26, 2020

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

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