Occasional Xs: How it works (CCXLXXII)

 

#HowItWorks

“We manufacture the appearance of growth through inflation...are we actually growing this economy, or is it just fluff, in terms of inflated dollars?” (Chris Whalen)

The U.S. #Economy runs on #Profit. Macroeconomic profit Qm is given by the axiomatically correct… pic.twitter.com/W1qbd4E2qw

— E.K-H (@AXECorg) October 9, 2024

Occasional Xs: How Solow messed up growth theory and why economists don't get it right to this day (III)

 

#Economics#FailedFakeScience

The history of economic thought is the history of scientific failure. The major approaches are mutually contradictory & axiomatically false & materially/formally inconsistent & ALL got #Profit wrong. When the foundational concepts of the subject…

— E.K-H (@AXECorg) March 16, 2024

Occasional Xs: How Solow messed up growth theory and why economists don't get it right to this day (II)

 

The history of economic thought is the history of scientific failure. The major approaches are axiomatically false & materially/formally inconsistent & ALL got #Profit wrong.

Sending Solow’s growth model to the dump of proto-scientific historyhttps://t.co/Cg3CZgHnKw

— E.K-H (@AXECorg) December 22, 2023

See also answer to

Werning

Ghironi

Blanchard

Scheuer

Grossman

Hosseini

Antras

Bergstresser 

Kofoed

Parker

Jones

Hicksian

List

Boettke

Koppl

Tabarrok

Méon

Cunningham

Bernstein

MartinezBravo

Panizza

Akcigit

Fuster

Vernengo 

Occasional Xs: How it works (CVII)

 

Public debt increases for 200+ yrs. The 3-sector #ProfitLaw Q≡(G−T)+(I−S)+Yd implies #PublicDeficitIsPrivateProfit. #DeficitSpendingMoneyCreation is a #FreeLunch for the #Oligarchy. Their #FinancialWealth grows with #PublicDebt. This is the #LifeFormula of the #MarketEconomy. pic.twitter.com/EvGpFGadIW

— E.K-H (@AXECorg) November 9, 2023

Occasional Xs: How it works (CVI)

 

The US polity is an #Oligarchy with Congress/Treasury/Fed/BigBusiness as integral parts. The #ProfitLaw implies #PublicDeficitIsPrivateProfit & #PrivateFinancialWealth≈#PublicDebt. #DeficitSpendingMoneyCreation is a #FreeLunch for the Oligarchy. Thx for the strong dose, POTUS!

— E.K-H (@AXECorg) November 8, 2023

Occasional Tweets: Zero-growth means breakdown

 

#LearnEconomics

The 3-sector #ProfitLaw Q≡(G−T)+(I−S)+Yd implies #PublicDeficitIsPrivateProfit. So, #DeficitSpendingMoneyCreation is a #FreeLunch for the #Oligarchy i.e. growing #PublicDebt is the existential prerequisite for #LateCapitalism i.e. #ZeroGrowth means #BreakDown.

— E.K-H (@AXECorg) May 18, 2023

Occasional Tweets: How Solow messed up growth theory and why economists don't get it right to this day (I)

 

#Economics#FailedFakeScience

Growth models are 'real' i.e. they do NOT contain the nominal variable #Profit i.e. they do NOT show how countries “make more money”. That is, they are scientifically worthless. ⇒https://t.co/Cg3CZgHVA4

See the #EconomicsGodEquation pic.twitter.com/baBPL1GPEQ

— E.K-H (@AXECorg) December 9, 2022

MMT/GND: Another case of bad people capturing a good cause

Comment on Nathan Tankus/Andrés Bernal/Raúl Carrillo on ‘The Green New Deal will be tremendously expensive. Every penny should go on the government’s tab.’*

Blog-Reference and Blog-Reference on Sep 26

It cannot be otherwise, bad people always and everywhere claim to promote the good cause. This is rather old stuff: “Everyone sees what you seem to be, few know what you really are; and those few do not dare take a stand against the general opinion.” (Machiavelli) This is why corruption comes in the cloak of philanthropy and ruin comes in the cloak of salvation. As a rule of thumb, public opinion is upside down: “Fair is foul, foul is fair.” (Shakespeare)

A new version of political deception is MMT’s promotion of environmental protection. The communicative fact of the matter is that nobody can argue against environmental protection just as nobody can argue against peace, freedom, wealth, love, solidarity, motherhood, equity, and the welfare of humankind.

The economic fact of the matter is that MMT is a program for the permanent enrichment of the Oligarchy. This is impossible to sell to the general public, therefore, MMT has to be repackaged as a program for the benefit of WeThePeople. Luckily, this is not very hard: “The vulgar crowd always is taken by appearances, and the world consists chiefly of the vulgar.” (Machiavelli)

Accordingly, Nathan Tankus/Andrés Bernal/Raúl Carrillo argue: “The Green New Deal is a vital way to address the social threat of climate change. Some GND advocates want to make the idea more palatable by relying on indirect financing like public-private partnerships or loans to private companies. While the ideas are designed to make the Green New Deal more politically palatable, indirect financing will also blunt the changes made by the GND. … Accordingly, people who truly want to see a GND in our time should fully embrace the power of the public purse.”

Economically, the “power of the public purse” works via the macroeconomic Profit Law which says Q≡Yd+(I−S)+(G−T)+(X−M) with Q as macroeconomic profit. The Law boils down to Public Deficit (G−T>0) = Private Profit Q which means that the Oligarchy’s financial wealth and public debt grow in lockstep. It is the very characteristic of the free-market economy that it is already for a long time on the life support of the state. Profit is produced mainly by the government through deficit-spending/money-creation. The Oligarchy, in turn, uses the opulent free lunches to corrupt what remains of the state’s legislative, executive, judiciary institutions, including academia.

As a matter of principle, any GND measure can be realized with a balanced budget. NO MMTer will ever propose that. The message of the MMT do-gooders is deficit-spending/ money-creation.

MMT is not only bad science and bad policy but MMTers are also bad people. How can we know this? Quite easy, Nathan Tankus/Andrés Bernal/Raúl Carrillo is an #EconBlocker.#1 Genuine scientist do NOT block their critics but try to refute them, yet for stupid/corrupt agenda pushers blocking/suppression is second nature.

Egmont Kakarot-Handtke


* Business Insider
#1 Economists/MMTers: agenda pushers, distractors, blockers, muters, censors

Related 'Fraud comes always in the cloak of philanthropy, salvation, or threat of doom' and 'Is MMT good for WeThePeople or for the Oligarchy?' and 'Links on MMTers push Wall Street’s agenda' and 'No MMT illusions! YOU are going to pay for it' and 'How counterfeiters save America with an extra profit and make WeThePeople pay for it' and 'The half-truths and half-falsehoods of MMT' and 'MMTers are NOT Friends-of-the-People' and 'MMT: The fusion of Wall Street and Academia' and 'MMT and the Green New Deal: Where is the snag? (I)' and 'MMT and the Green New Deal: Where is the snag? (II)' and 'How MMT enlightens Washington' and 'Very busy these days: Wall Street’s agents' and 'How to spot economics trolls'.

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Cast of #EconBlockers

“Raúl Carrillo is the director of the Modern Money Network.

Andrés Bernal is a lecturer at CUNY Queens College Department of Urban Studies and an advisor to Rep. Alexandria Ocasio Cortez.

Nathan Tankus is a research fellow at the Clarke Business Law Institute's Program on the Law and Regulation of Financial Institutions and Markets at Cornell Law School and is the research director at the Modern Money Network.”

***

REPLY to Andrew Anderson on Sep 26

With regard to the realization of environmental protection, you ask: “With or without increases in the money supply? If ‘with’ how do you propose to increase the money supply in an ethical manner?”

This is a secondary question. If you want to reduce CO2, for example, the first logical question to ask is who is the biggest polluter? The simple answer is the military. So, real Progressives would radically reduce the military and redirect its humongous budget to environmental-friendly measures. This budgetary/monetary neutrality, of course, is anathema for the deficit-spending/money-creating false Progressives of MMT.

MMT/GND deficit-spending/money-creation as environmental policy is fully in line with the ethics of the Pentagon and Wall Street. It is NOT for the benefit of WeThePeople.

***

Mike Norman Economics Nov 14

Twitter May 16, 2021 A question of allocation

Twitter Aug 12, 2021 Climate and deficit

New Daily, Alan Kohler: The money for dealing with climate change will have to be printed

What comes first: eco-self-destruction or oeco-self-destruction?

Comment on Sandwichman on ‘Business As Usual: Running on Empty’

Blog-Reference

Ecological self-destruction is the subject matter of physics, biology, climatology, etcetera. Economists have nothing to say about these scientific issues because they are simply too incompetent for science. Economics is, after 200+ years, still at the proto-scientific level.

To make matters short, the central economic question is: Is the monetary economy sustainable on its own terms, that is, even if it faces no physical limits? The answer is NO.

Let us agree that, roughly speaking, the monetary economy as we know it can only exist if macroeconomic profit is positive and that the economy will break down if macroeconomic profit turns to loss. So, the question is, can it happen? and in case yes, when will it happen?

Now, the axiomatically correct macroeconomic Profit Law says Q≡Q_m+Q_n (i) with Q_m≡Y_d+(X−M)+(G−T)+(I−S_m) (ii) which simplifies to Q_m≡I−S_m (iii) if Q_n, Y_d, X, M, G, T is set to zero.#1 Eq. (iii) says that monetary profit Q_m is positive as long as the business sector’s investment expenditures are greater than the household sector’s saving. Or, if the household sector’s budget is balanced in each period, i.e. S_m=0 ⇒ Q_m=I (iv), and this means that monetary profit Q_m is positive as long as investment expenditures are positive (depreciation is a sub-item of Q_n). In other words, the economy must grow or it drops dead. This may happen before the economy reaches the physical limits of growth.

The basic message of the Profit Law is that the monetary economy gets in trouble as soon as economic growth, expressed by I, slows down. The critical point is in the most elementary case at I=0.

However, the economically critical point may be reached earlier or later. The axiomatically correct macroeconomic Profit Law tells everyone that the point is reached earlier if, for example, the household sector’s saving S_m is greater than zero. The point is reached later if the government runs a deficit, i.e. if G−T is greater than zero.

The task of economic policy is to end economic growth before the physical limits are reached without destroying the economy by unknowingly switching from macroeconomic profit to loss. Needless to emphasize that economists have NO idea how to accomplish this feat. Walrasian, Keynesian, Marxian, and Austrian economics is proto-scientific garbage and therefore absolutely useless for economic policy.

The sad fate of humanity is: the (world-)economy will NOT break down for physical/ ecological reasons but because of the scientific incompetence a.k.a. stupidity of economists. How shabby an end compared to flood or fire.

Egmont Kakarot-Handtke


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

Related 'Which breakdown?' and 'Mathematical Proof of the Breakdown of Capitalism' and 'Zero-sum capitalism' and 'Major Defects of the Market Economy' and 'Squaring the Investment Cycle'.

***

REPLY to Anonymous on Nov 1

Obviously, you lack basic knowledge of the history of economic thought: “Late in life, moreover, he [Napoleon] claimed that he had always believed that if an empire were made of granite the ideas of economists if listened to, would suffice to reduce it to dust.” (Viner, 1963)

Nothing has changed since Napoleon. The stupidity of economists is as destructive as it ever was.#1, #2


#1 As Napoleon said: don’t listen to economists
#2 Economists and the destructive power of stupidity

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REPLY to Sandwichman on Nov 1

You complain: “GDP and GDP growth has become the increasingly opaque lens through which we view society and ‘the economy.’ It is a cracked, scratched, smudged, distorting lens that may not even enable us to tell whether what we view through it is upside up or upside down.”

Fact is that economists have never gotten their foundational concepts straight and are too stupid for the elementary mathematics that underlies macroeconomics. The concept of GDP is a case in point.

For the axiomatically correct relationship between aggregate demand, investment, depreciation, productivity, price, income, and profit see Squaring the Investment Cycle.

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REPLY to Barkley Rosser, Sandwichman on Nov 2

Thank you for the information, the improved sentence reads: “The axiomatically correct macroeconomic Profit Law tells everyone that the [critical] point is reached earlier if, for example, the household sector’s saving Sm is greater than zero. The point is reached later if the government runs a deficit, i.e. if (G−T) is greater than zero.”

The beauty of this summary consists of answering the fundamental economic question: “... is the existing economic system in any significant sense self-adjusting.” (Keynes)

So, macrofounded economics tells everyone that microfounded equilibrium or steady-state models are a priori false and that the market system will eventually break down because of its built-in positive feedback mechanisms and NOT for sociological reasons, i.e. the revolution of the proletariat, or for ecological reasons, i.e. the limitedness of resources or the overabundance of pollution.

At the moment, the US economy runs already on life-support, i.e. on government deficit spending. Take it away and macroeconomic profit turns into macroeconomic loss and the economy breaks down. There is really no need for economists to calculate the “ … costs of abating carbon dioxide emissions and the long term future climate impacts from climate change.” (Newbold, Summary of the DICE model) because the economy as we know it has NO long-term future.#1

Economists should know how the economic system works but they don’t. For 150+ years, they waffle about supply-demand-equilibrium implying that the system regulates itself. This tenet is either self-deception or fraud or both. In any case, it catapults economists out of science.


#1 Mathematical Proof of the Breakdown of Capitalism

***

REPLY to Blissex on Nov 4

You say: “Dear Sandwichman welcome to the branch of Rabbit Hole Studies that is national statistics. :-)”

Economists know that science is about formal and material consistency: “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-art testing.

Economists know also that their proper business is political agenda pushing and NOT science. So, they deliberately try to keep everything in the swamp of vagueness and inconclusiveness because they know also: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman) This, of course, is the life insurance of failed/fake scientists.#1, #2

It is not an accident that economists apply concepts like utility, rational expectations, and aggregate real capital, which are obviously not measurable. And when the discussion comes to empirical testing, economists vanish through the jib door like the would-be gold makers of earlier times. The door bears the inscription ‘Measurement Problems’.

Political agenda pushers have learned this trick from priests.#3 The subject matter of priests is NONENTITIES. As J. S. Mill put it: “Mankind in all ages have had a strong propensity to conclude that wherever there is a name, there must be a distinguishable separate entity corresponding to the name; ...” This is the Fallacy of Reification.

The characteristic of economists is that they avoid well-defined concepts like the plague. Note that income, monetary profit, aggregate demand, and GDP can, in principle, be defined and measured with the precision of two decimal places but economists have managed to make a veritable mess of these foundational concepts.#4, #5

Economists advertise their stuff as science, well knowing that their theories/models are built upon NONENTITIES and that they will break down as soon as it comes to testing: “… suppose they did reject all theories that were empirically falsified ... Nothing would be left standing; there would be no economics.” (Hands)

National Statistics is NOT a Rabbit Hole but has been deliberately made a jib door through which failed/fake economists vanish when their proto-scientific fool’s gold is put to the acid test.#6, #7


#1 Postmodernism — the philosophy of scientific write-offs
#2 For details see cross-references Failed/Fake Scientists
#3 Wikipedia, Priest
#4 The Common Error of Common Sense: An Essential Rectification of the Accounting Approach
#5 Wikipedia and the promotion of economists’ idiotism
#6 Go! ― test the Profit and Employment Law
#7 Failed economics: The losers’ long list of lame excuses

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REPLY to Blissex on Nov 6

You say: “… unfortunately I very strongly disagree that studies of the political economy can be a ‘science’ as in proper accuracy and falsification, in large part because experiments are difficult and repeatability is pretty rare, and never mind with the measurement problems, because the ‘Laws of Economics’ are not immutable, unless they are kept in ‘the swamp of vagueness and inconclusiveness’.”

Of course, you disagree. Take notice that your worn-out excuses have been refuted long ago.#1

According to its self-definition, economics is a science since Adam Smith/Karl Marx and this is celebrated once a year with the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel”.#2 So, economics has to be judged according to the well-known scientific standards of material/formal consistency.

Your fatal blunder is to maintain that economics is a social science while, in fact, it is a systems science.#3 And while there are no behavioral laws there are systemic laws.

Economists have not figured out these laws to this day. In fact, they are too stupid for the elementary mathematics that underlies macroeconomics.

Keynes’ scientific incompetence can be exactly located in the GT: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (p. 63)

Keynes got macroeconomic profit wrong: “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.)

Let this sink in: the economist Keynes NEVER understood the foundational concept of his subject matter. Because profit is ill-defined the complete theoretical superstructure of Keynesianism is false. Keynesian policy guidance NEVER had valid scientific foundations. It has NEVER been anything else than political blather.

The elementary version of the axiomatically correct Profit Law, which is measurable with the precision of two decimal places, reads Q_m≡I−S_m with Q_m as monetary profit and S_m as monetary saving. And this means that since Keynes/Hicks ALL I=S/IS-LM models are false.#4 Macroeconomics is proto-scientific garbage. Microeconomics is even worse.

So after 80+ years of storytelling/blather, Keynesians, Post-Keynesians, Anti-Keynesians, New Keynesians, MMTers, Sandwichman, Blissex, and the rest of stupid/corrupt political agenda pushers together with all their peer-reviewed articles/textbooks/blog posts have finally to be flushed down the scientific toilet.


#1 Failed economics: The losers’ long list of lame excuses
#2 The real problem with the economics Nobel
#3 Economics is NOT a social science
#4 Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It

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#PointOfProof
Nov 7
before
 after

Neoclassical growth theory: modeling gone nuts

Comment on Lars Syll on ‘Solow’s Nobel Prize lecture’

Blog-Reference

Solow summarizes: “The end result is a construction in which the whole economy is assumed to be solving a Ramsey optimal-growth problem through time, disturbed only by stationary stochastic shocks to tastes and technology. To these, the economy adapts optimally. Inseparable from this habit of thought is the automatic presumption that observed paths are equilibrium paths. So we are asked to regard the construction I have just described as a model of the actual capitalist world.”

Standard economics is based on this verbalized set of hardcore propositions a.k.a. 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)

What has to be realized, in addition, is that these premises require a pigtail of auxiliary assumptions. So, in order to be applicable, constrained optimization HC3 requires the auxiliary assumption of a well-behaved production function.

What economists in their bottomless scientific incompetence have not realized in 150+ years is that HC3, HC5, and HC6 are plain NONENTITIES. The methodological point is this: every model that contains just one NONENTITY is a priori false. Methodologically it holds, that if the set of premises is false the whole analytical superstructure is false.

Neoclassical growth theory applies a barrage of NONENTITIES. Among others#1

• The representative consumer is supposed to solve an infinite-time utility-maximization problem. This is a priori false because utility and HC3 are NONENTITIES.
• Neoclassical growth models consist alone of real variables. This is false because the economy constitutes itself through the interaction of real AND nominal variables. There is no such thing as a ‘real’ economy, in other words, ALL ‘real’ models are a priori false.
• There is no such thing as an equilibrium or disequilibrium. In other words, ALL equilibrium models are a priori false.#2
• Profit is a nominal variable and cannot appear in a real model. The neoclassical profit theory is false.
• Economics has to be macrofounded because no way leads from behavioral microfoundations to an understanding of how the economic system works.

“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, 300 BC) The neo-Walrasian axioms, aka microfoundations, are NOT “certain, true, and primary”. Because of this, neoclassical growth models are scientifically worthless.

Economics has to move from microfoundations to macrofoundations.#3

Here is the correct starter set: (A0) The objectively given and most elementary systemic configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.

• (A1) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L,
• (A2) O=RL output O is equal to productivity R times working hours L,
• (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These behavior-free premises are certain, true, and primary, or, stated in comparative terms, superior to the neo-Walrasian microfoundations and Keynes’ defective macrofoundations.#4

Under the conditions of market-clearing X=O and budget-balancing C=Y_w in each period, the price is given by P=W/R (1), i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w and monetary saving as S_m≡Y_w−C. It always holds Q_m≡−S_m, in other words, the business sector’s surplus = profit is equal to the household sector’s deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, total monetary profit is zero.

Under the condition of market clearing and budget balancing, the elementary economy reduces to three independent variables, i.e. W, R, L, and the price P as the dependent variable. The changes from period to period are formally given by

• W_t=W_t-1(1+w_t) The wage rate in period W_t is given by the wage rate in the previous period W_t-1 and the rate of change for the current period w_t.
• R_t=R_t-1(1+r_t) Analogous for the productivity.
• L_t=L_t-1(1+l_t) Analogous for labor input.

The rates of change for future periods w_t, r_t, l_t are random variables with an a priori unknown distribution function. Given the enumerated premises and conditions, the market clearing price performs a random walk which is determined in turn by the random paths of wage rate and productivity. The general formula for the evolving elementary production-consumption economy is given on Wikimedia.#5 This path equation replaces all neoclassical growth models.

For this equation, Computational Irreducibility in the sense of Stephen Wolfram, A New Kind of Science, Wolfram Media, 1959, pp. 737 ff. holds.

In the next step, the condition of budget balancing has to be lifted. This brings saving/dissaving and profit/loss into existence. Note that in the Wikipedia article #1 the word profit does not appear once. For this reason alone, neoclassical growth models are NO representation of the “actual capitalist world”.#6 There is NO such thing as a capitalist world without profit/loss. Economists should know this.

To make matters short, the axiomatically correct macroeconomic Profit Law for an evolving economy is given here without further explanation. It holds, with Q_m monetary profit/loss, S_m monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Y_d distributed profit

• Q_m≡−S_m in the elementary production-consumption economy,
• Q_m≡I−S_m in the elementary investment economy (note I is NEVER equal S_m),
• Q_m≡(G−T)+(I−S_m) in the investment economy with government deficit/surplus,
• Q_m≡Y_d+(X−M)+(G−T)+(I−S_m) in the open economy with distributed profit.

Neoclassical growth models do not contain macroeconomic profit. They are nothing more than a bad modeling joke.#7 Economists award themselves fake Nobel Prizes for this proto-scientific garbage.

Egmont Kakarot-Handtke


#1 Wikipedia Ramsey–Cass–Koopmans model
#2 Equilirium
#3 True macrofoundations: the reset of economics
#4 How Keynes got macro wrong and Allais got it right
#5 Wikimedia AXEC25 Time evolution of the elementary production-consumption economy including profit distribution
#6 Profit and the collective failure of economists
#7 Infantile model bricolage, or, How many economists can dance on a non-existing pinpoint?

Related 'Squaring the Investment Cycle'.

Robots, exploitation, and the reproducible economy

Comment on David Ruccio on ‘Don’t worry?!’

Blog-Reference

David Ruccio maintains “Sure, new forms of automation might lead to higher productivity and much else that Tyson and Lund find so alluring. But who’s going to benefit? If we go by the last few decades, large corporations and wealthy individuals are the ones who are going to capture most of the gains from the new technologies.” and “When it comes to separating fact from fiction, aside from the embarrassing epistemological positions liberals rely on, where are the statistics that might help us make sense of what is going on out there ― numbers like the Reserve Army of Unemployed, Underemployed, and Low-wage Workers or the rate of exploitation.”

This blather proves that heterodox economists, too, have no idea how the economy works.#1

In order to fully appreciate the proto-scientific state of both orthodox and heterodox economics, one needs the axiomatically correct theory. Because economics is a failed science it has to be reconstructed from scratch.

As the new analytical starting point, the pure production-consumption economy is defined with this set of macroeconomic 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) Y_w=WL wage income Y_w 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.

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

The price is determined by the wage rate, which takes the role of the nominal numéraire, and productivity.

From (1) follows W/P=R, i.e. the real wage is equal to the productivity. So, for a start, labor gets the whole product.

Monetary profit for the economy as a whole is defined as Q_m≡C−Y_w and monetary saving as S_m≡Y_w−C. It always holds Q_m≡−S_m, in other words, the business sector’s surplus = profit (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget-balancing total monetary profit is zero.

In order that profit comes into the world, consumption expenditures C must be greater than wage income Y_w, that is, the household sector must run a deficit. This means, first of all, that profit for the economy as a whole has NOTHING to do with productivity. From the fact, that an individual firm can increase profit by increasing productivity does NOT follow that this is true for the economy as a whole. What we have here is the built-in blunder of microfounded economics, i.e. the Fallacy of Composition.

The axiomatically correct Profit Law is given for the GENERAL case as Q_m≡Y_d+(I−S_m)+(G−T)+(X−M). Legend: Q_m total monetary profit, Y_d distributed profit, I investment expenditures, S_m monetary saving, G government expenditures, T taxes, X exports, M imports. Neither Walrasians, nor Keynesians, nor Marxians, nor Austrians got profit right until this very day.#3 This is why economics is a failed science and why economists have always been such a threat to their fellow citizens.

Now, we let robots in the pure production-consumption economy. The immediate effect of improved organization/machinery/robots is an increase in productivity.

From (1) follows that if productivity increases over time the market-clearing price falls. So, in order to avoid deflation, the wage rate has to rise at the same rate as productivity. Output O increases according to axiom (A2) O=RL. The real situation of the household sector, measured in output, improves continuously with increasing productivity R and employment L. Let L here denote full employment. The workers get the whole product O and profit Q_m is zero because the budget is balanced C=Y_w. The bottom line for the elementary production-consumption economy is that robots need not pose any problems with regard to underemployment or exploitation.

The problems come from another direction. Increasing output O (i) requires more raw materials/energy, and (ii), may run against the point of satiation/bliss point. So, there are limits to growth.

At the bliss point O* the economy switches from ascent to gliding, that is, the implicit causality of O=RL has to be changed to L=O*/R, that is, total labor time L is reduced with increasing productivity. In other words, the productivity increase translates at the bliss point O* into an increase of leisure.

The challenge is, how to reduce total labor input L without creating unemployment for a part of the labor force. The sustainable economy behind the bliss point works as follows: with productivity R up, L goes down and L per worker goes down proportionally, the wage rate goes up with the rate of productivity increase, the price remains constant, the real wage is always equal to the increased productivity, the budget is balanced C=Y_w, the market is cleared X=O, leisure increases across the board, L goes asymptotically to zero.

In the end, it holds “… in the long run leisure is an economic summum bonum.” (Georgescu-Roegen) The growth of material consumption is only an interim phase.

Egmont Kakarot-Handtke


#1 Heterodoxy and Pluralism, too, are proto-scientific garbage
#2 Wikimedia AXEC31 Elementary production-consumption economy
#3 Profit for Marxists

Sending Solow’s growth model to the dump of proto-scientific history

Comment on Luis C. Corchón on ‘A Malthus-Swan Model of Economic Growth’

Blog-Reference

Economics fits Feynman’s definition of 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.”

Orthodox economics messed up the theory of production. Georgescu-Roegen was quite clear about “… the completely faulty form by which standard economics represents a production process”. As a consequence, all growth models of the Solow-type since the QJE paper of 1956 are worthless. But the problem goes deeper. ALL microfounded models are worthless.

The whole theoretical superstructure of Orthodoxy is based upon this set of hardcore propositions a.k.a. 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)

In order to be applicable HC2, which translates formally into calculus, requires a lot of auxiliary assumptions, most prominently a well-behaved production function. The compelling reason for the introduction of out-of-thin-air auxiliary assumptions is that without these specifications the axiom HC2 does NOT work and the whole of Marginalism, which hinges on HC2, falls apart.

It should be pretty obvious that the axiomatic core of Orthodoxy contains THREE NONENTITIES: (i) constrained optimization HC2, (ii) rational expectations HC4, (iii) equilibrium HC5. Every theory/model that contains a NONENTITY is a priori false. This includes all Solow-type models.

Economics has to start — NOT with behavioral assumptions — but with the ‘monetary theory of production’ (Keynes). The elementary production-consumption economy is defined with systemic (= behavior-free) 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) Y_w=WL wage income Y_w is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. The set of premises is minimal, that is, it cannot be reduced further, only expanded. The set contains no nonentities like maximization or equilibrium and no normative assertions. Note that all variables are measurable.

For a start, it holds market-clearing X=O and budget-balancing C=Y_w.

Monetary profit is defined as Q_m≡C−Y_w and monetary saving is defined as S_m≡Y_w−C. It always holds Q_m≡−S_m, which is the most elementary form of the macroeconomic Profit Law.

Under the conditions of market-clearing and budget-balancing in each period, the price follows as P=W/R, i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand. It translates into W/P=R, i.e. the real wage is equal to the productivity.

The changes in the wage rate from period to period are formally given by Wt=Wt-1(1+wt). Analogous for all other independent variables. The rates of change for future periods are, for a start, taken to be random variables.

With this, the formal framework of the elementary growth model for the elementary production-consumption economy is defined. The systemic formal framework#2, which combines the nominal and real key variables, fully replaces all Solow-type real models.

It does not matter how employment develops, that is, whether the labor force grows or shrinks over time. If the productivity remains constant with growing (shrinking) employment the real wage does not change. If productivity increases, so does the real wage. Labor gets always its full product. Monetary profit is zero. If the productivity declines the real wage heads towards the subsistence level. This, though, has nothing to do with exploitation. Needless to say at the subsistence level, all further expansion comes to a halt. This is the Malthusian outcome. The ultimate driver of real affluence is increasing returns.

This was the first step. In the second step investment and capital have to be added.#3

Egmont Kakarot-Handtke


#1 The future of economics: why you will probably not be admitted to it, and why this is a good thing
#2 The Economics God Equation (including distribution) is shown on Wikimedia AXEC25

The Economics God Equation ®

For this equation Computational Irreducibility in the sense of Stephen Wolfram, A New Kind of Science, Wolfram Media, 1959, pp. 737 ff. holds.

#3 Squaring the Investment Cycle

Related 'Saving NEVER equals investment' and 'Is Nick Rowe stupid or corrupt or both?' and 'Macro for dummies' and 'Do first your macroeconomic homework!' and 'Settling the Theory of Saving' and  'Solow and the ludicrousness of economics' and 'Robert Solow and Lars Syll, fake scientists' and 'Solow and the ludicrousness of economics' and 'The moral of the story' and 'No future for the representative economist' and 'All economists together now: Solow’s Swan Song' and 'When substandard thinkers dabble in science it is called economics' and 'When substandard thinkers dabble in science it is called economics' and 'High profits and low economics' For details of the big picture see cross-references Failed/Fake Scientists and cross-references Paradigm Shift and cross-references Refutation of I=S.

The future of economics: why you will probably not be admitted to it, and why this is a good thing

Comment on Merijn Knibbe on ‘Clarence Ayres on the economic concept of capital’

Blog-Reference and Blog-Reference

“... economics is a big omnibus which contains many passengers of incommensurable interests and abilities.” (Schumpeter, 1994, p. 827)

Economics is a scientific failure. Being stranded in the middle of nowhere, evidently, nobody else is responsible than the confused drivers/passengers of the big omnibus themselves. These can be roughly divided into the major sects: Walrasians, Keynesians, Marxians, and Austrians. What all have in common are substandard scientific abilities. Generally speaking, the four approaches are built upon unacceptable premises and therefore violate Aristotle’s first principle of science: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Posterior Analytics)

What are the premises that are accepted by the majority of economists? Krugman put it thus “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point ...”. This starting point has to be abandoned because these premises are by no stretch of the imagination certain, true, and primary.

At this critical juncture, the economist has to make up his mind: either to defend the indefensible beliefs of one of the four sects or to replace the foundational assumptions and to begin in earnest with the overdue reconstruction of the whole theoretical superstructure of economics. Based on the history of economic thought, it is a fair bet that the representative economist will mess up things. However, this has to be proved, so here is the challenge.

The most elementary economic configuration is the production-consumption economy which consists of the household sector and the business sector which in turn consists initially of one giant fully integrated firm. This minimalist configuration is defined for one period by three equations.

(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.

If you cannot understand or accept these almost self-evident equations, which hold for the world economy as a whole and every closed national economy, you are out of economics. These premises are certain, true, and primary, or stated in relative terms, obviously superior to the neo-Walrasian axioms (Weintraub, 1985, p. 147) or to Keynes’ defective formal basis (1973, p. 63).

For the graphical representation of the three equations see Wikimedia AXEC31:

At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the conditions of budget balancing, i.e. C=Yw, and market clearing, i.e. X=O. Note that the ray in the southeastern quadrant is not a linear production function; the ray tracks any underlying production function. Note also that the wage rate W is an average if the individual wage rates are different among the employees, which is the general case.

Under the conditions of market-clearing and budget-balancing in each period, the price follows from the three equations as P=W/R (1), i.e. the market-clearing price is always equal to unit wage costs. To repeat, the price is for a start taken as the dependent variable, of course, it can be treated as an independent variable (2015). Also worth mentioning is that money as a transaction medium is left out here for brevity; for the full picture see (2015).

The elementary production-consumption economy works as follows. If the wage rate W is lowered, the market-clearing price P falls. If the number of working hours L is increased the price remains constant, provided productivity R does not change. If productivity decreases the price P rises. If productivity increases the price falls. In any case, labor gets the whole product, the real wage W/P is invariably equal to the productivity R according to (1), and profit for the business sector as a whole is zero. All changes in the system are fully reflected by the market-clearing price P. The elementary production-consumption economy is reproducible for an indefinite number of periods.

The changes from period to period are formally given by:
(iv) W_t=W_t-1(1+w_t) The wage rate in period t — W_t — is given by the wage rate in the previous period W_t-1 and the rate of change for the current period w_t.
(v) R_t=R_t-1(1+r_t) analogous for productivity.
(vi) L_t=L_t-1(1+l_t) analogous for labor input.

The rates of change for future periods wt, rt, lt are random variables with an a priori unknown distribution function. Because of this, we cannot predict the price in period t=10 but we can test it in period t=10 or any other future period. As a matter of principle, (1) is a testable proposition.

Given the enumerated premises and conditions, the market-clearing price performs a random walk which is determined in turn by the random walks of wage rate and productivity. Equation (1) in combination with (iv) to (vi) replaces the ridiculous supply-demand-equilibrium model of Econ 101.

From the premises and conditions follows for a start:

• The elementary production-consumption economy constitutes itself through the interaction of real and nominal variables. There is no such thing as a ‘real’ economy, in other words, all ‘real’ models are a priori false.
• There is no such thing as equilibrium. The product market is cleared and the budget is balanced but the economy is not moved by an Invisible Hand toward some equilibrium, e.g. full employment. In other words, all equilibrium models are a priori false.
• The commonplace quantity theory does not hold. Inflation/deflation depends initially on the development of wage rate and productivity and nothing else. If the period changes of the wage rate are exactly equal to the changes in productivity i.e. wt=rt, absolute price stability prevails over all future periods despite the random variations of productivity and employment. Hence, price stability/inflation/deflation is not a monetary phenomenon.
• The marginal principle, which ultimately derives from the unacceptable behavioral assumption of utility maximization, does not apply and plays no role at all in price determination. All marginalist models are a priori false.
• Supply and demand functions are NONENTITIES. Well-behaved production functions and decreasing returns do not exist. These premises are neither required nor admissible.
• Neither the income distribution nor the distribution of the real product depends on the marginal principle. All marginalist distribution models are a priori false.

In the next analytical steps, the number of firms is increased, which leads to the determination of relative prices, and the conditions of market clearing and budget-balancing are lifted, which gives rise to the phenomena of inventory changes, profit/loss,#1, and the increase/decrease of the stocks of money and debt. It is pretty obvious that all economic phenomena can successively be derived from the three premises (i) to (iii). Stock-flow consistency is guaranteed ab initio.

In order to develop the first economic theory since Adam Smith that satisfies the scientific criteria of formal and material consistency, the unacceptable foundational propositions of Walrasianism, Keynesianism, Marxianism, and Austrianism have to be abandoned. Scientists would immediately perform the necessary Paradigm Shift but economists are no scientists. Their acceptance of the maximization-and-equilibrium world for more than 100 years is forever disqualifying. Because of this, the still confused sorta-kinda economists are kindly asked to leave the big omnibus now.

Egmont Kakarot-Handtke


References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Schumpeter, J. A. (1994). History of Economic Analysis. New York: Oxford University Press.
Weintraub, E. R. (1985). Joan Robinson’s Critique of Equilibrium: An Appraisal. American Economic Review, Papers and Proceedings, 75(2): 146–149. URL


#1 Profit and the collective failure of economists

Immediately preceding Economics as a fool’s paradise.

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POINTER on Economist's View

No, economists do not understand what is in their models.

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ANSWER to Bragi on Jan 4

This is the corpus delicti from the General Theory “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, p. 63)

This two-liner is conceptually and logically defective because Keynes did not come to grips with profit theory.

“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., 2010, pp. 12-13, 16)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all I=S and IS-LM models.

For the formal proof see Why Post Keynesianism Is Not Yet a Science.

Keynesians will not make it into the future of economics because of proven logical incompetence over more than 80 years.

References
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. The Collected Writings of John Maynard Keynes Vol. VII. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

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REPLY Brain-dead blather, comment on anne on Jan 4

You give good advice “Take a Krugman model, such as IS-LM and clearly explain what is not understood”.

Let me return the good advice: Read more, think more, and blog less.

IS-LM is provably false since the 1930s but the representative economist has realized nothing for more than 80 years. This includes you and, of course, Paul Krugman, see Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It.

Here is the core of the proof.

The formal basis of the General Theory is given with: “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (Keynes, 1973, 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., 2010, pp. 12-13, 16)

Because profit is ill-defined the whole theoretical superstructure of Keynesianism is false, in particular, all IS-LM models. See also Why Post Keynesianism Is Not Yet a Science.

Keynesians will not make it into the future of economics because of proven logical incompetence — they have no idea of what is in their models. This includes you and, of course, Paul Krugman — the proto-scientific proponent of model bricolage.

The scary fact of the matter is economists cannot tell the difference between profit and income [“A satisfactory theory of profits is still elusive.” Desai, 2008, p. 10] but tell politicians and the central bank how to run the economy.


References
Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, 1–11. Palgrave Macmillan, 2nd edition. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Tómasson, G., and Bezemer, D. J. (2010). What is the Source of Profit and Interest? A Classical Conundrum Reconsidered. MPRA Paper, 20557: 1–34. URL

Related 'Summary on "Musings on Whether We Consciously Know More or Less than What Is in Our Models…"' and 'Wikipedia, economics, scientific knowledge, or political agenda pushing?'

For details of the big picture see cross-references Paradigm Shift.

For more about Paul Krugman see AXECquery.

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Wikimedia AXEC172