Robots, exploitation, and the reproducible economy

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

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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

Zombie economics

Comment on graccibros and Ishi Crew on ‘Quick thoughts on the stock market and the economy’

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(i) I think your perspective is wrong. The issue is not about fixing the Chinese stock market by kicking out some Flash Boys. That is Roubini zombie economics. What is required is to find out what financial institutions China needs for the transition to a full-employment economic future in a stationary world economy. My hypothesis is that she is better off without a stock market.

(ii) I agree with you that in economics almost everything and the exact opposite has already been said sometime, somewhere, by somebody. There is an abundance of opinion and a dearth of knowledge. In other words, economics is a failed science.

“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)

The true theory is not to be found in the history of economic thought. Heterodoxy either develops a new Paradigm or goes down the opinion drain like Walrasianism, Keynesianism, Marxianism, Austrianism, Ishiism, and all the rest.

Egmont Kakarot-Handtke


Related 'The heterodox perspective becomes dominant' and 'Quick rethinking of the stock market'.

The heterodox perspective becomes dominant

Comment on BC on ‘Quick thoughts on the stock market and the economy’

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I agree with your analysis. My perspective, however is different. You say financial crises are the nature of capitalism. The Nature-argument implies — intentionally or unintentionally — that things have to be accepted as given like the law of gravity. This, however, is not true for institutions like the financial sector of any regional/national economy.

We know that orthodox economics is a scientific failure. Therefore, the familiar explanations of how the economy works cannot be taken at face value. Heterodoxy has to do better. This implies that we do not ask: does the stock market work as the efficient market hypothesis assumes? but: do we need a stock market? And if so, how can we make sure that it functions without negative externalities?

As you say, the market economy can only exist as growing economy. On the other hand, it cannot grow much longer. The core problem is how to achieve the transition to a stationary or even shrinking economy without a self-reinforcing downward spiral. This is the actual situation of China, but under the broader perspective it is the situation of the world economy.

Neither Walrasian nor Keynesian theory can deal with the situation. My point is: we have a lot of good descriptions of what goes on in the world economy — and yours is one of it — but we still lack a comprehensive theory that includes some ideas for a soft transition of the world economy after expansion has run its course.

China's chance is that it invents the new sustainable economic order and the appropriate institutions. This presupposes to rethink theoretical economics from the ground up. Hence, Chinese economists are by nature heterodox. Why are we still discussing local pseudo-issues like DSGE, rational expectations, Lucas’s mathiness, or McCloskey's silliness? That has become rather boring, to say the least.

Egmont Kakarot-Handtke

Connects to 'Quick rethinking of the stock market'. For the long run perspective see the working papers 'Mathematical proof of the breakdown of capitalism' and 'Beginning, crises, and end of the money economy'.