Occasional X: How it works (DXXII)

“I am once again asking you guys to read Baumol's 'Marx and the Iron Law of Wages'.” (Jules)

According to the axiomatically correct macroeconomic Law of Supply and Demand, the real wage W/P in the elementary production-consumption economy ⇓ moves with the productivity R and… pic.twitter.com/A0v3YRiWnY

— AXEC (@EgmontHandtke) September 26, 2026

Occasional X: Clueless economists / Exploitation (I)

“A reminder that if unions aren’t raising productivity, they’re unable to significantly boost wages without resorting to tactics that shield their members from competition (from, for instance, foreign workers or automation) but impose costs on everyone else …” (Chris Freiman)… pic.twitter.com/EKnNypzyOl

— AXEC (@EgmontHandtke) September 8, 2026

For more about cross-over exploitation, see the AXECquery. 

Occasional X: How it works (DIII)

“Marx explained the basic contradiction over 150 years ago. Competition compels each capitalist to raise productivity and cheapen commodities because doing so increases relative surplus-value and gives them an advantage over competitors.” (Dohaciel Ygzgzot)

This is the problem… pic.twitter.com/pRePIrVMRd

— AXEC (@EgmontHandtke) August 17, 2026

Occasional X: How it works (D)

“Capitalism is very good at producing wealth. What it is not particularly good at is making sure that wealth, productive capacity, and human needs actually line up. That was one of the lessons Keynes took from the Great Depression. …The conventional answer was that markets would… pic.twitter.com/LrAe3wZ6Fv

— AXEC (@EgmontHandtke) August 7, 2026

Occasional X: How it works (CDXCV)

 

“Two economists published a mathematical proof that AI will destroy the economy. It’s called 'The AI Layoff Trap' and it exposes a devastating economic contradiction that every CEO can see coming, and none of them can stop.” (How to Prompt)

Actually, this is the old problem of a… pic.twitter.com/LpVeB5NCXJ

— AXEC (@EgmontHandtke) July 29, 2026

Occasional X: Clueless economists / Science (CCCLX)

 

“In both ecosystem and economy, survival rewards efficiency. Inefficiency is punished by extinction.” (Michael Rothschild)

Wrong analogy.

The U.S. economy is known to run on profit. Macroeconomic profit is given by the axiomatically correct Profit Law / Balances Equation…

— AXEC (@EgmontHandtke) July 19, 2026

Occasional X: Clueless economists / Science (CCCXL)

“The standard of living of the common man is higher in those countries which have the greatest number of wealthy entrepreneurs.” (Ludwig von Mises)

Ludwig von Mises never understood profit and, by consequence, how the economic system works.

First of all, it is important to…

— AXEC (@EgmontHandtke) June 9, 2026

“The richness of America Is provided by NATURAL RESOURCES Like oil.” (Lawrence Widman)

The richness of America consists of valued natural resources, valued capital goods, and financial assets. The source of the latter is private/public deficit-spending, which materializes as…

— AXEC (@EgmontHandtke) June 10, 2026

Occasional X: Clueless economists / Productivity (I)

#Economics#AllYouNeedToKnow

“However, standard labour productivity aggregates wages, profits, rents, and interest into its numerator while normalising solely by labour input. ” (James Young)

Because wages are flows and macroeconomic profit is a difference of flows, “wages,… pic.twitter.com/9VTSfzlh7V

— AXEC (@EgmontHandtke) January 24, 2026

Related 'A vacuous analysis of profits and productivity' and 'The GDP death blow for the economics profession'

Occasional X: The futile attempt to recycle Marginalism (III)

#Economics#AllYouNeedToKnow

“A simple but underappreciated point: While unions may improve the material conditions of some workers on the margins, they will never sustainably push wages over workers’ marginal products.” (Chris Freiman)

There is the average real wage rate and… pic.twitter.com/get8q7uFU9

— AXEC (@EgmontHandtke) January 21, 2026

Occasional X: How it works (CDXXVII)

#Economics#AllYouNeedToKnow

“Logical inconsistency: your model assumes real wage = productivity via market-clearing prices, then concludes no surplus exists.” (Dohaciel Ygzgzot)

The appendix shows the relationship between real wages W/P and productivity R under the condition… pic.twitter.com/5nl4qIYM2b

— AXEC (@EgmontHandtke) December 21, 2025

Occasional X: Clueless economists / Real Wage (IV)

#Economics#AllYouNeedToKnow

According to the axiomatically correct macroeconomic Law of Supply and Demand, the real wage W/P in the elementary production-consumption economy ⇓ moves with the productivity R and declines with deficit-spending/money-creation i.e., ρE>1. The… pic.twitter.com/W3ygHudoOr

— AXEC (@EgmontHandtke) November 9, 2025

Related: 'How it works (CDXX)' 

Occasional X: Clueless economists / Profit (CX)

#Economics#AllYouNeedToKnow

“Why is it so difficult to understand that economic freedom drives innovation, growth and prosperity?” (Michael Arouet)

Why is it so difficult for economists to understand that productivity drives the profit of a single firm but not the total profit…

— AXEC (@EgmontHandtke) November 6, 2025

Occasional X: Clueless economists / Real Wage (III)

#Economics#AllYouNeedToKnow

According to the axiomatically correct macroeconomic Law of Supply and Demand, the real wage W/P in the elementary production-consumption economy ⇓ moves with the productivity R and declines with deficit-spending/money-creation i.e. ρE>1. The… pic.twitter.com/iJ4w76cO3A

— AXEC (@EgmontHandtke) September 1, 2025

Occasional X: The futile attempt to recycle Milton Friedman (XXXI)

 

#Economics#FailedFakeScience

“No one knows how to make a pencil, as Friedman explains.” (Connor Boyack)

The history of economic thought is the history of scientific failure. The major approaches (Walrasianism, Keynesianism, Marxianism, Austrianism, and their derivatives) are…

— E.K-H (@AXECorg) January 5, 2025

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 Tweets: Bring yourself up to speed ― New Econ 101 (I)

 

#BringYourselfUpToSpeed

The macroeconomic #LawOfSupplyAndDemand and the #ProfitLaw tell one exactly how #Price P & #Profit Qm move as a function of #WageRate W, Productivity R & #DeficitSpendingMoneyCreation ρE. pic.twitter.com/9c9Ecy6ngN

— E.K-H (@AXECorg) March 10, 2023

Reminder on inflation

Comment on Bill Mitchell on ‘Inflation is not necessarily due to excessive spending’*

Blog-Reference

The most elementary macroeconomic price formula states P=ρ_EW/R. ρ_E>1 represents private/public deficit-spending/money-creation and this implies that a period deficit produces a ONE-OFF price hike and NOT inflation.

In order to get inflation going, the wage increases have to be constantly above the productivity increases. In fact, the exact opposite happened.#1 The price formula tells one that in this case, deflation will result.

The crucial point is that the quantity of money is NOT among the price determinants. The price formula implicitly refutes the commonplace Quantity Theory.#2

Egmont Kakarot-Handtke

* Billy Blog

#1 Chart, Twitter, Economic Policy Institute: The gap

#2 Links on Inflation

Price theory — more than beating the dead horse again and again

Comment on Blair Fix on ‘Supply and demand deconstructed’

Blog-Reference and Blog-Reference

Blair Fix summarizes “… Jonathan Nitzan demolishes the neoclassical theory of prices. It’s a master lesson in how to deconstruct a theory.”

Mainstream economics, though, does not need another deconstruction. #1, #2, #3 Mainstreamers have admitted failure long ago. “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990)

Clearly, everybody knows by now for sure that supply-demand-equilibrium is proto-scientific garbage. Back in 1954, Schumpeter found it still necessary to diffuse doubts about the scientific status of the supply-demand-equilibrium approach “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.”

So, the right thing to do is to bury and forget the “Totem of the Micro”: “If neoclassical theory is bunk, then what explains prices? Jonathan Nitzan, together with Shimshon Bichler, argues that prices are inseparable from power.” #4

With this, though, everything remains in the old economics-is-a-social-science paradigm. The behavioral assumption of price-taking is replaced by the assumption of price-setting. To remain in the psycho-sociological sphere is the lethal blunder of the power approach because economics is a systems science. #5

Here are the basics of the macrofoundations approach. The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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.

Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This is the most elementary case; i.e., when the economy gets more complex, the price equation becomes longer.*

The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e., the real wage is always equal to the productivity, no matter how the wage rate W is set or how long the individual or aggregate working time L is. Full employment is possible; the workers always get the whole product O. The workers' living standard depends ultimately on productivity.

The logical next steps are (i) to skip the conditions of market-clearing and budget-balancing and to allow for price-setting, (ii) to differentiate the business sector into multiple firms and markets, and to determine the price structure. #6

Egmont Kakarot-Handtke


#1 There is NO such thing as supply-demand-equilibrium
#2 How to Get Rid of Supply-Demand-Equilibrium
#3 The Law of Supply and Demand: Here It Is Finally
#4 This echoes Macht und ökonomisches Gesetz (Power and Economic Law), Schriften des Vereins für Socialpolitik, 1972.
#5 Your economics is refuted on all counts: here is the real thing
#6 See Ch. 3 Market interdependence in Sovereign Economics

Related 'Economists never understood how the price mechanism works' and '10 steps to leave cargo cult economics behind for good' and 'Primary and Secondary Markets' and 'Hayek and other informationally retarded proto-economists' and 'How to overcome the manifest silliness of Econ 101 and save the economy' and 'Why you should NEVER use supply-demand-equilibrium' and 'Traditional Heterodoxy’s paradigmatic impotence' and 'Essentials of Constructive Heterodoxy: The Market' and 'Understanding Profit and the Markets: The Canonical Model' and 'Major Defects of the Market Economy' and 'How to finally hammer down the nails in the coffin of Monty Python economics' and 'Get it econ suckers: behavioral microfoundations ⇒ false, systemic macrofoundations ⇒ true' and 'Econ 101: Economists flunk the intelligence test at the first hurdle' and 'The monstrous utility-supply-demand-equilibrium failure' and 'To this day, economists have produced NOT ONE textbook that satisfies scientific standards' and 'Ch. 9, Price mechanism vs quantity mechanism in Sovereign Economics, BoD'.

“Totem of the Micro” has been coined by Axel Leijonhufvud.

* E.g. AXEC64

***

#PointOfProof

Aug 29

post missing

Basics of Value Theory

Comment on Peter Cooper on ‘Developments in Value Theory’

Blog-Reference and Blog-Reference

Value and Profit Theory are false since Ricardo and Marx. #1, #2

In order to see where Value Theory fails, one has to start with the most elementary version of what Keynes called the “monetary theory of production”.

As the analytical starting point, the elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) 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). The price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This translates into W/P=R (2), i.e., the real wage is equal to the productivity. Eq. (1) is the macroeconomic Law of Supply and Demand.

Monetary profit/loss of the business sector is defined as Q≡C−Y_w (3), and monetary saving/dissaving of the household sector is defined as S≡Y_w−C (4). It always holds Q+S=0, or Q≡−S (5), in other words, the business sector’s nominal surplus = profit equals the household sector’s nominal deficit = dissaving. Vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. Under the initial condition of budget-balancing C=Y_w, total monetary profit is zero. Eq. (5) is the most elementary version of the macroeconomic Profit Law.

What is needed for a start is two things: (i) a central bank which creates money on its balance sheet in the form of deposits, and (ii) a legal system which declares the central bank’s deposits as legal tender.

Deposit money is needed by the business sector to pay the workers who receive the wage income Y_w per period. The need is only temporary because the business sector gets the money back if the workers fully spend their income, i.e., if C=Y_w. Overdrafts are needed by the household sector for consumption expenditures if the households want to spend before they get their income.

For the case of a balanced budget C=Y_w, the idealized transaction pattern of deposits/overdrafts of the household sector at the central bank over the course of one period is shown under the label of Graphic. #3

The household sector’s deposits/overdrafts are zero at the beginning and end of the period. Money is continually created and destroyed during the period under consideration. There is NO such thing as a fixed quantity of money. The central bank plays an accommodative role and supports the autonomous market transactions between the household and the business sector. From this follows the average stock of transaction money as M=kY_w (6), with k determined by the transaction pattern.

If employment L is doubled, the average stock of transaction money M doubles. In a well-designed fiat money economy, growth is not hampered by a lack of a transaction medium. NO capitalist with a sack of gold coins is needed to advance the wage bill.

In sum, (i) money is a generalized IOU, (ii) money is created and destroyed by the transactions between the household and the business sector, (iii) the value of money is given by (2) W/P=R, i.e. is equal to the productivity, (iv) the workers get the whole product, (v) profit is zero.

Because there is only labor input in the elementary production-consumption economy, eq. (2) represents the essence of the Labour Theory of Value.

Eq. (2) can be generalized for two different products, and then the Law of Value says P₁/P₂=R₂/R₁, i.e., the price relation is inverse to the productivity relation, that is, the whole price structure is objectively determined by the productivities, if, for a start, the wage rate is equal in all lines of production. Note that macroeconomic profit is zero because of budget balancing, i.e., C=Y_w. Macroeconomic profit only appears if C>Y_w, and this has NOTHING AT ALL to do with capitalists or value creation.

A well-defined monetary market economy is different from the woolly idea of capitalism. Profit has NOTHING to do with surplus value or exploitation but with deficit-spending/ dissaving of the household sector. Profit cannot be attributed to a factor. This is the fundamental methodological defect of classical and neoclassical Distribution Theories.

Egmont Kakarot-Handtke


#1 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#2 Profit for Marxists
#3 Graphic AXEC98  Idealized transaction pattern

Related 'Value — the Bermuda Triangle for economic theories' and  'The Pure Logic of Value, Profit, Interest' and 'The Value of Water and Diamonds: Back to Square One' and 'The Logic of Value and the Value of Logic' and 'The Logical Interface Between Objective Macrofoundations and Subjective Valuations'.

***

Graphic AXEC89d Circuit Law of Value

How to get rid of inflation and deflation

Comment on Brian Romanchuk on ‘Why Is A Positive Inflation Rate A Good Thing?’

Blog-Reference and Blog-Reference

Brian Romanchuk takes the question “Why is inflation above 0% considered a good thing?” as a starting point for a psychological/sociological study of what different people/groups think about how inflation/deflation affects them.

His answer is the usual vacuous ‘It depends’: “I could try to discuss the economic theory questions associated with price stability. My view is ambivalent.… As a result, I would argue that the economic theory is a red herring: what matters is political economy.”

Needless to stress that this is not the answer of a scientist: “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)

Brian Romanchuk, though, is not a scientist but a blathering agenda-pusher. He has NO idea how the monetary economy works. Time to remind him of some economic basics and of some basics of scientific methodology as well.

As the correct analytical starting point, the elementary 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) 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.

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). This is the most elementary form of the macroeconomic Law of Supply and Demand.

In the most elementary case, the price P is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. The quantity of money is NOT among the price determinants. This puts the commonplace Quantity Theory forever to rest.

In the elementary production-consumption economy, the price P performs a random walk, which in turn depends on the random changes of productivity R and wage rate W. Note that the price movements do not depend on the random changes of employment or on whether the economy is at full employment or not. Equation (1) implies W/P=R (2), i.e., the real wage W/P is always equal to the productivity R.

Monetary profit for the economy as a whole is defined as Qm≡C−Yw, and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit equals 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.#1 As long as C=Yw, macroeconomic profit is zero.

As a matter of principle, the elementary production-consumption economy is reproducible for an indefinite time. It is important to note that there is no such thing as an equilibrium or price stability, or full employment.

Now it is easy to see that price stability, that is, a rate of inflation/deflation of zero, can be established with a simple institutional rule: change of wage rate = change of productivity. In equation (1), this stabilizes the price P forever at the given level. No inflation, no deflation, no random price movements.

So, if the Legitimate Sovereign decides to implement absolute price stability and asks the economist how to achieve this goal, the economist has a clear-cut answer. It reads W'=R' with ' indicating the rate of change. No wish-wash here, no ambiguity, no senseless blather.

Of course, things become more complex in the investment economy, and when the price becomes the independent variable and employment becomes the dependent variable. These issues have been dealt with elsewhere. #2 The bottom line is that to set the inflation target at 2 percent is plain economic idiocy.

Egmont Kakarot-Handtke


#1 Truth by definition? The Profit Theory has been axiomatically false for 200+ years
#2 See cross-references Employment

***

REPLY to Brian Romanchuk on Aug 19 and Blog-Reference on Aug 21

You say: “There is an extremely long line of academic arguments that suggest the determination of what is ‘good’ is a question of philosophy/ethics/religious belief.”

True, and this is why economists should stop blathering about philosophical, ethical, and religious issues. Science is about true/false and NOT about good/bad. #1 Economics has to define itself as a systems science.

The elementary version of the correct (objective, systemic, behavior-free, macrofounded #2) Employment Law is shown under the label Graphic. #3

From this equation follows inter alia:
(i) An increase in the expenditure ratio ρ_E leads to higher employment L (the Greek letter ρ stands for ratio). An expenditure ratio ρ_E greater than 1 indicates a budget deficit = credit expansion, a ratio ρ_E less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρ_F≡W/PR leads to higher employment.

The complete Employment Law contains, in addition, profit distribution, the public sector, and foreign trade.

Items (i) and (ii) cover Keynes’ familiar arguments about aggregate demand. The factor cost ratio ρ_F, as defined in (iii) embodies the macroeconomic price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R.

Roughly speaking, the Legitimate Sovereign has two policy parameters: ρ_E and ρ_F. Now, ρ_F, in turn, is composed of W/PR. It is pure dilettantism to set the rate of price increase at 2% without taking the other variables into consideration. What has to be set is NOT one isolated variable but the policy parameter ρ_F as a whole. A smart policy to reduce unemployment and to eventually arrive at full employment would be to set P'=0 and W' >R' with ' indicating the rate of change. If, for example, P' is set at 2% and W'=R' unemployment INCREASES.

This brings us back to the initial question: “Why is inflation above 0% considered a good thing?”

The answer is because economics is a failed science, and economists do not know how the monetary economy works. False theory leads to false policy guidance. With their defective employment theory, economists bear the intellectual responsibility for the social devastation of mass unemployment. #4 Therefore, it is NOT good for society to take these incompetent blatherers seriously. #5


#1 Beware of the moralizing economist
#2 The macrofoundations approach starts with three systemic 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. For a start it holds X=O.
#3 Graphic AXEC62 Employment Law
#4 For details of the big picture, see cross-references Employment
#5 As Napoleon said: don’t listen to economists