#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) December 21, 2025
“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
Showing posts with label real/nominal. Show all posts
Showing posts with label real/nominal. Show all posts
December 21, 2025
Occasional X: How it works (CDXXVII)
November 7, 2025
Occasional X: How it works (CDVII)
#Economics#AllYouNeedToKnow
— AXEC (@EgmontHandtke) November 7, 2025
“Your reminders that the stock market isn’t the economy, and unchecked corporate greed isn’t compatible with a moral or thriving society.” (Melanie D'Arrigo)
Profit has nothing to do with a thriving economy or the welfare of WeThePeople. Actually,…
February 19, 2024
Occasional Xs: How it works (CLIV)
#PrintYourselfRich
— E.K-H (@AXECorg) February 19, 2024
The US #Economy runs on #Profit. The #ProfitLaw implies that the greater part is produced by #DeficitSpendingMoneyCreation. So, #PrivateFinancialWealth ≈ #PublicDebt. #Capitalism/#BigBusiness/#WallStreet are nominally kept alive by the profit-generating #Fed. pic.twitter.com/u0kGtbtPS8
June 13, 2018
Nick Rowe’s soap bubbling about money
Comment on Nick Rowe on ‘The Parable of the Fruit Trees’
Blog-Reference
“The apple producer produces apples. The banana producer produces bananas. The cherry producer produces cherries.” The economist produces proto-scientific garbage.
What is wrong with Nick Rowe’s depiction of the economy? The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money. The fact that Nick Rowe clings to a long-defunct barter parable proves that he has no idea how the economy works.
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.
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.
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 Yw 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=Yw. 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=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown under the label Graphic. #1
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 simply supports the autonomous market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money. There is NO such thing as “an excessive demand for one particular asset (the medium of exchange) relative to other assets.”
The transaction equation reads M=κPRL (2) in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. If employment is halved, the average stock of transaction money M halves.
As long as the central bank finances the wage bill Yw=WL with money creation out of nothing, and with wage rate W and productivity R fixed, the price P does not move one iota according to (1). The average quantity of money M increases/decreases according to (2) but there is no inflation/deflation. Money is absolutely neutral. The creation of fiat money is the correct way of bringing money into the elementary production-consumption economy.
Egmont Kakarot-Handtke
#1 Graphic AXEC98 Idealized transaction pattern
Related 'The futile attempt to recycle Sraffa' and 'Money: from silly stories to the true theory' and 'Primary and Secondary Markets' and 'Exchange in the Monetary Economy' and 'Getting out of the economics swamp'.
Nick Rowe clarifies his parable: “It is not an excessive desire to accumulate assets that causes recessions; it is an excessive demand for one particular asset (the medium of exchange) relative to other assets. It’s about the composition of their portfolios of assets, not about the total size of that portfolio.”
The two lethal blunders of Nick Rowe are:
• to frame elementary economic activity as barter of stocks of goods a.k.a. assets,
• to frame money as an asset.
The elementary economy is about production and consumption. Input is a real flow = labor time per period, output is a real flow = apples/bananas/cherries per period, income is a nominal flow, and so on. Money is neither a stock nor a flow. Money is not a thing, not a real asset. Money is information. The information is stored on a medium, e.g. magnetic data carrier, a clay tablet, paper, a coin, etcetera. As a matter of principle, money cannot be scarce; only the physical data carrier can become scarce.
Money starts as a medium of transaction, as shown in the previous post, and it supports ANY level of economic activity. Problems arise if the households do not balance their budget, i.e., do not fully spend their period income, that is, if consumption expenditures C are less than wage income Yw. In this case, the household sector’s deposits at the central bank increase, and money morphs from a pure transaction medium to a store of value. #1
Precisely at this point, money becomes an asset, more precisely a financial asset. All real assets (apples, bananas, cherries) are zero at the beginning of the period and at the end of the period. The household sector’s portfolio consists solely of deposits at the central bank. This is how the monetary economy works. Nobody barter apples for bananas.
In the elementary production-consumption economy, the household sector can increase its stock of money if C is less than Yw. This has some obvious consequences for the business sector.
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.
The simple fact of the matter is: as the household sector’s deposits at the central bank rise, so do the business sector’s overdrafts. The central bank’s balance sheet is always balanced. The business sector’s debt increases, that is, its deposits at the central bank = money become very, very scarce, and THIS causes a recession. The composition of output and changes in the composition of output (apples, bananas, cherries) are absolutely irrelevant.
Now, give Nick Rowe a banana, and send him back into the barter woods.
#1 Money and time
In the two preceding posts, it has been argued that Nick Rowe’s barter parable lacks the elementary features of the monetary economy. Barter models have always been false and will always be false because the economy constitutes itself through the interaction of real and nominal variables.#1
It has been argued that the composition of output and changes in the composition of output (apples, bananas, cherries) are irrelevant for the money transactions between the household and the business sector and that they do not cause a recession. Only a reduction of total nominal demand causes a recession.
To see this, let us make a simple example. Imagine two firms, 1 and 2 for short. The wage rates in both firms are equal, so the total wage income is Yw=WL1+WL2, and total employment is L=L1+L2.
In the initial period, the respective prices are equal to unit wage costs, i.e., P1=W/R1 and P2=W/R2. Therefore, the profit in both firms is initially zero. The household sector spends total wage income on the two products, i.e., C=Yw, so there is neither saving nor dissaving.
The distribution of total consumption expenditures C=C1+C2 between the two products determines the production of the respective quantities and the respective labor inputs L1 and L2. It holds C=C1+C2=W(L1+L2)=WL=Yw.
So, if the household sector wants more of product 1, it spends more on it and less on product 2, such that C1 goes up and C2 goes down, and C remains unchanged. Accordingly, the business sector employs more workers in firm 1 and fewer in firm 2, such that L1 goes up and L2 goes down, and total employment L and total income Yw remain unchanged.
The relative price, i.e., the exchange relation between the two products, remains unchanged, i.e., P1/P2=R2/R1.
So, changes in the preferences between the two products are mirrored in changes in the distribution of labor input between the two firms. This configuration can go on forever. Problems arise only if the household sector reduces total consumption expenditures C, such that saving Sm≡C−Yw is now greater than zero. In this case, the business sector makes a loss and the economy goes into recession.
#1 The irreparable unreality of all ‘real’ models
The lethal flaw of The Parable of the Fruit Trees is the obsolete concept of direct barter. In the monetary economy, barter is indirect. In methodological terms, barter economists commit the Fallacy of Insufficient Abstraction.
In the monetary economy, agent 1 does not produce product 1 and barter directly with agent 2, who produces product 2.
In the monetary economy, agent 1 works in firm 1, which produces product 1 and gets the wage income Yw1, which is paid with a transfer of deposits at the central bank.
Analogous to agent 2.
Agent 1 then spends part of his income on product 2. Analogous to agent 2, who spends part of his income on product 1. This is how INDIRECT barter happens. By buying the other firm’s output, agent 1 barters “his” product with agent 2 and vice versa.
Indirect barter presupposes the existence of money, which is used (i) to pay the wage bill, and (ii) to buy the products. Money is created and destroyed in the process. The cycle can be repeated ad infinitum. Transaction money is NOT a stock and NOT an asset. It is zero at the beginning and the end of the cycle.
Changes in preferences lead to changes in output and production, and the allocation of labor between the two firms. Total spending and total employment, and the relative prices do NOT change in the process. Production adapts quantitatively to preferences.
Put simply, if agents want more of product 1 and less of product 2, more labor input has to be allocated to firm 1 and less to firm 2. The change in the composition of output has NO effect on the monetary transactions. Total income and total consumption expenditures remain unaffected.
Only if the household sector saves, which gradually increases its “stock of money” = average amount of deposits at the central bank, problems arise in the elementary production-consumption economy. Changes in the composition of output do not, they only lead to a reallocation of labor input.
Needless to emphasize that normally the two processes, growth/shrinkage of total production/output/average stock of transaction money, and change in the composition of output, are mixed. Analytically, though, they have to be strictly kept apart.
You say: “There has to be money to start the transaction cycle. Money is needed for a purchase.”
Money is created in the act of transaction. Either the business sector creates an IOU and hands it over as wage payment to the household sector, or the central bank creates uno actu deposits for the wage receivers and corresponding overdrafts for the firms. The purchase of the output destroys money = deposits at the central bank. This is how fiat money works. The transactions themselves create/destroy money.
At the logical beginning of economic activity, there is neither a stock of goods nor of money. All physical stocks have to be produced, and money is produced (or ‘created out of nothing’) by the central bank/banking system. The economic analysis starts at zero. And this also holds for the theory of money.
You say: “Simultaneous is a relative when money moves faster than fruit.”
The purpose of a parable is to make one point as clear as possible. For this purpose, the situation is radically simplified. Needless to emphasize that simplification and idealization are legitimate tools of analysis. However, as always, there is the possibility that the tool is misapplied and that the dilettantish scientific craftsman hits his thumb instead of the nail.
The problem with simplification/idealization is that it erroneously abstracts reality away instead of all the details that are indeed irrelevant to the question at issue. One of the most prominent examples of the Fallacy of Insufficient Abstraction is simultaneity. This is to eliminate time, and this is sufficient to relegate any model/parable into the Dancing-Angels-On-A-Pinpoint category.
Nick Rowe’s Parable of the Fruit Trees, too, falls into this category. Its lethal defect is long known as the Hahn problem: “The Hahn problem reveals three things. First, a perfect barter GE solution always exists in any ‘monetary’ model erected on Walrasian GE microeconomic foundations. Second, inessential monetary features are easily attached to perfect barter microeconomic foundations but are as easily removed, leaving the perfect barter solution intact. Third, attaching such inessential additions leads to a logical error; the misuse of language that produces invalid conclusions.”*
Nick Rowe and Matthew Young have not gotten the point that in the monetary economy, barter is indirect and that, therefore, the discussion of direct barter is pretty much a revival of the Dancing-Angels-On-A-Pinpoint disputations of the Middle Ages.
* Colin Rogers, Review of Political Economy
You say: “One problem we have translating your parable to the real world is that asset prices are generally highly flexible (and arguably asset markets can be much more easily cleared by price movements than goods and labour markets).”
Not at all! The real problem is that economists have, after 200+ years, still no clue how the price and profit mechanism works.
To begin with, there are TWO fundamentally different types of markets.#1 In the elementary production-consumption economy, one has the flows of labor input and product output (apples, bananas, cherries per period). The quantity produced is, for a start, equal to the quantity sold and consumed. So the stock of products is zero at the beginning and the end of the period. The primary markets (e.g., product, labor) deal with flows.
If part of the output is not consumed in the same period, then there remains a stock of durable goods = real assets, e.g., houses. This is how the secondary markets come into existence.
The point is that the primary and secondary markets run on entirely different principles and that they can by no stretch of the scientific imagination be described with the barter parable nor with supply-demand-equilibrium. What Leijonhufvud has called the Totem-of-the-Micro has always been nincompoop economics.
#1 Primary and Secondary Markets
Nick Rowe concludes: “If we see recessions as a cluster of symptoms, that usually (but not always) go together, it’s not obvious how we define a ‘recession’, and whether we define it in terms of symptoms or of causes. And what’s true by definition and what’s true/false as a statement of fact. Bit like defining different illnesses.”
There is science, and it is binary true/false with NOTHING in between. Truth is well-defined for 2300+ years by formal and material consistency. And there is the large swamp of cargo cult science where, as Keynes said, “nothing is clear and everything is possible.”
In the swamp, vagueness, indeterminacy, inconclusiveness, confusion dressed up as complexity, unresolved contradictions, storytelling, filibuster, gossip, finicky scholasticism (Popper), known/unknown unknowns, and the Humpty Dumpty Fallacy are the prevailing components of communication. #1, #2, #3
This, of course, has not gone unnoticed: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982)
From Nick Rowe’s Parable of the Fruit Trees, nothing can be learned about how the price and profit mechanism works. This does not matter, though, because the purpose of economics has never been to clarify matters and to advance science but to keep everything and everybody in the swamp of inconclusiveness.
Vagueness and inconclusiveness protect the scientifically incompetent and secure the status quo because:
• “... you cannot prove a vague theory wrong.” (Feynman)
• “With enough fog emitted, almost anything becomes possible.” (Mirowski)
One will not find a single scientist in the swamp. #4 The swamp has always been the habitat of parable-tellers and cargo cult scientists.
Egmont Kakarot-Handtke
#1 It is better to be precisely right than roughly wrong
#2 “This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions.” (Blinder)
#3 “’When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.”
#4 Getting out of the economics swamp
Blog-Reference
“The apple producer produces apples. The banana producer produces bananas. The cherry producer produces cherries.” The economist produces proto-scientific garbage.
What is wrong with Nick Rowe’s depiction of the economy? The subject matter of economics is, as Keynes said, the ‘monetary theory of production’. This sets the frame for the theory of money. The fact that Nick Rowe clings to a long-defunct barter parable proves that he has no idea how the economy works.
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.
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.
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 Yw 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=Yw. 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=Yw, the idealized transaction sequence of deposits/overdrafts of the household sector at the central bank over the course of one period is shown under the label Graphic. #1
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 simply supports the autonomous market transactions between the household and the business sector.
From this follows the average stock of transaction money as M=κYw, with κ determined by the transaction pattern. In other words, the average stock of money M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy NEVER runs out of money. There is NO such thing as “an excessive demand for one particular asset (the medium of exchange) relative to other assets.”
The transaction equation reads M=κPRL (2) in the case of budget balancing and market clearing. If employment L is doubled, the average stock of transaction money M doubles. If employment is halved, the average stock of transaction money M halves.
As long as the central bank finances the wage bill Yw=WL with money creation out of nothing, and with wage rate W and productivity R fixed, the price P does not move one iota according to (1). The average quantity of money M increases/decreases according to (2) but there is no inflation/deflation. Money is absolutely neutral. The creation of fiat money is the correct way of bringing money into the elementary production-consumption economy.
Egmont Kakarot-Handtke
#1 Graphic AXEC98 Idealized transaction pattern
Related 'The futile attempt to recycle Sraffa' and 'Money: from silly stories to the true theory' and 'Primary and Secondary Markets' and 'Exchange in the Monetary Economy' and 'Getting out of the economics swamp'.
***
REPLY to Nick Rowe on Jun 14Nick Rowe clarifies his parable: “It is not an excessive desire to accumulate assets that causes recessions; it is an excessive demand for one particular asset (the medium of exchange) relative to other assets. It’s about the composition of their portfolios of assets, not about the total size of that portfolio.”
The two lethal blunders of Nick Rowe are:
• to frame elementary economic activity as barter of stocks of goods a.k.a. assets,
• to frame money as an asset.
The elementary economy is about production and consumption. Input is a real flow = labor time per period, output is a real flow = apples/bananas/cherries per period, income is a nominal flow, and so on. Money is neither a stock nor a flow. Money is not a thing, not a real asset. Money is information. The information is stored on a medium, e.g. magnetic data carrier, a clay tablet, paper, a coin, etcetera. As a matter of principle, money cannot be scarce; only the physical data carrier can become scarce.
Money starts as a medium of transaction, as shown in the previous post, and it supports ANY level of economic activity. Problems arise if the households do not balance their budget, i.e., do not fully spend their period income, that is, if consumption expenditures C are less than wage income Yw. In this case, the household sector’s deposits at the central bank increase, and money morphs from a pure transaction medium to a store of value. #1
Precisely at this point, money becomes an asset, more precisely a financial asset. All real assets (apples, bananas, cherries) are zero at the beginning of the period and at the end of the period. The household sector’s portfolio consists solely of deposits at the central bank. This is how the monetary economy works. Nobody barter apples for bananas.
In the elementary production-consumption economy, the household sector can increase its stock of money if C is less than Yw. This has some obvious consequences for the business sector.
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.
The simple fact of the matter is: as the household sector’s deposits at the central bank rise, so do the business sector’s overdrafts. The central bank’s balance sheet is always balanced. The business sector’s debt increases, that is, its deposits at the central bank = money become very, very scarce, and THIS causes a recession. The composition of output and changes in the composition of output (apples, bananas, cherries) are absolutely irrelevant.
Now, give Nick Rowe a banana, and send him back into the barter woods.
#1 Money and time
***
REPLY to Nick Rowe and other commentators on Jun 15In the two preceding posts, it has been argued that Nick Rowe’s barter parable lacks the elementary features of the monetary economy. Barter models have always been false and will always be false because the economy constitutes itself through the interaction of real and nominal variables.#1
It has been argued that the composition of output and changes in the composition of output (apples, bananas, cherries) are irrelevant for the money transactions between the household and the business sector and that they do not cause a recession. Only a reduction of total nominal demand causes a recession.
To see this, let us make a simple example. Imagine two firms, 1 and 2 for short. The wage rates in both firms are equal, so the total wage income is Yw=WL1+WL2, and total employment is L=L1+L2.
In the initial period, the respective prices are equal to unit wage costs, i.e., P1=W/R1 and P2=W/R2. Therefore, the profit in both firms is initially zero. The household sector spends total wage income on the two products, i.e., C=Yw, so there is neither saving nor dissaving.
The distribution of total consumption expenditures C=C1+C2 between the two products determines the production of the respective quantities and the respective labor inputs L1 and L2. It holds C=C1+C2=W(L1+L2)=WL=Yw.
So, if the household sector wants more of product 1, it spends more on it and less on product 2, such that C1 goes up and C2 goes down, and C remains unchanged. Accordingly, the business sector employs more workers in firm 1 and fewer in firm 2, such that L1 goes up and L2 goes down, and total employment L and total income Yw remain unchanged.
The relative price, i.e., the exchange relation between the two products, remains unchanged, i.e., P1/P2=R2/R1.
So, changes in the preferences between the two products are mirrored in changes in the distribution of labor input between the two firms. This configuration can go on forever. Problems arise only if the household sector reduces total consumption expenditures C, such that saving Sm≡C−Yw is now greater than zero. In this case, the business sector makes a loss and the economy goes into recession.
#1 The irreparable unreality of all ‘real’ models
***
REPLY to Nick Rowe on Jun 16The lethal flaw of The Parable of the Fruit Trees is the obsolete concept of direct barter. In the monetary economy, barter is indirect. In methodological terms, barter economists commit the Fallacy of Insufficient Abstraction.
In the monetary economy, agent 1 does not produce product 1 and barter directly with agent 2, who produces product 2.
In the monetary economy, agent 1 works in firm 1, which produces product 1 and gets the wage income Yw1, which is paid with a transfer of deposits at the central bank.
Analogous to agent 2.
Agent 1 then spends part of his income on product 2. Analogous to agent 2, who spends part of his income on product 1. This is how INDIRECT barter happens. By buying the other firm’s output, agent 1 barters “his” product with agent 2 and vice versa.
Indirect barter presupposes the existence of money, which is used (i) to pay the wage bill, and (ii) to buy the products. Money is created and destroyed in the process. The cycle can be repeated ad infinitum. Transaction money is NOT a stock and NOT an asset. It is zero at the beginning and the end of the cycle.
Changes in preferences lead to changes in output and production, and the allocation of labor between the two firms. Total spending and total employment, and the relative prices do NOT change in the process. Production adapts quantitatively to preferences.
Put simply, if agents want more of product 1 and less of product 2, more labor input has to be allocated to firm 1 and less to firm 2. The change in the composition of output has NO effect on the monetary transactions. Total income and total consumption expenditures remain unaffected.
Only if the household sector saves, which gradually increases its “stock of money” = average amount of deposits at the central bank, problems arise in the elementary production-consumption economy. Changes in the composition of output do not, they only lead to a reallocation of labor input.
Needless to emphasize that normally the two processes, growth/shrinkage of total production/output/average stock of transaction money, and change in the composition of output, are mixed. Analytically, though, they have to be strictly kept apart.
***
REPLY to Henry Rech on Jun 16You say: “There has to be money to start the transaction cycle. Money is needed for a purchase.”
Money is created in the act of transaction. Either the business sector creates an IOU and hands it over as wage payment to the household sector, or the central bank creates uno actu deposits for the wage receivers and corresponding overdrafts for the firms. The purchase of the output destroys money = deposits at the central bank. This is how fiat money works. The transactions themselves create/destroy money.
At the logical beginning of economic activity, there is neither a stock of goods nor of money. All physical stocks have to be produced, and money is produced (or ‘created out of nothing’) by the central bank/banking system. The economic analysis starts at zero. And this also holds for the theory of money.
***
REPLY to Matthew Young on Jun 18You say: “Simultaneous is a relative when money moves faster than fruit.”
The purpose of a parable is to make one point as clear as possible. For this purpose, the situation is radically simplified. Needless to emphasize that simplification and idealization are legitimate tools of analysis. However, as always, there is the possibility that the tool is misapplied and that the dilettantish scientific craftsman hits his thumb instead of the nail.
The problem with simplification/idealization is that it erroneously abstracts reality away instead of all the details that are indeed irrelevant to the question at issue. One of the most prominent examples of the Fallacy of Insufficient Abstraction is simultaneity. This is to eliminate time, and this is sufficient to relegate any model/parable into the Dancing-Angels-On-A-Pinpoint category.
Nick Rowe’s Parable of the Fruit Trees, too, falls into this category. Its lethal defect is long known as the Hahn problem: “The Hahn problem reveals three things. First, a perfect barter GE solution always exists in any ‘monetary’ model erected on Walrasian GE microeconomic foundations. Second, inessential monetary features are easily attached to perfect barter microeconomic foundations but are as easily removed, leaving the perfect barter solution intact. Third, attaching such inessential additions leads to a logical error; the misuse of language that produces invalid conclusions.”*
Nick Rowe and Matthew Young have not gotten the point that in the monetary economy, barter is indirect and that, therefore, the discussion of direct barter is pretty much a revival of the Dancing-Angels-On-A-Pinpoint disputations of the Middle Ages.
* Colin Rogers, Review of Political Economy
***
REPLY to Nick Edmonds on Jun 19You say: “One problem we have translating your parable to the real world is that asset prices are generally highly flexible (and arguably asset markets can be much more easily cleared by price movements than goods and labour markets).”
Not at all! The real problem is that economists have, after 200+ years, still no clue how the price and profit mechanism works.
To begin with, there are TWO fundamentally different types of markets.#1 In the elementary production-consumption economy, one has the flows of labor input and product output (apples, bananas, cherries per period). The quantity produced is, for a start, equal to the quantity sold and consumed. So the stock of products is zero at the beginning and the end of the period. The primary markets (e.g., product, labor) deal with flows.
If part of the output is not consumed in the same period, then there remains a stock of durable goods = real assets, e.g., houses. This is how the secondary markets come into existence.
The point is that the primary and secondary markets run on entirely different principles and that they can by no stretch of the scientific imagination be described with the barter parable nor with supply-demand-equilibrium. What Leijonhufvud has called the Totem-of-the-Micro has always been nincompoop economics.
#1 Primary and Secondary Markets
***
REPLY to Nick Rowe on Jun 20Nick Rowe concludes: “If we see recessions as a cluster of symptoms, that usually (but not always) go together, it’s not obvious how we define a ‘recession’, and whether we define it in terms of symptoms or of causes. And what’s true by definition and what’s true/false as a statement of fact. Bit like defining different illnesses.”
There is science, and it is binary true/false with NOTHING in between. Truth is well-defined for 2300+ years by formal and material consistency. And there is the large swamp of cargo cult science where, as Keynes said, “nothing is clear and everything is possible.”
In the swamp, vagueness, indeterminacy, inconclusiveness, confusion dressed up as complexity, unresolved contradictions, storytelling, filibuster, gossip, finicky scholasticism (Popper), known/unknown unknowns, and the Humpty Dumpty Fallacy are the prevailing components of communication. #1, #2, #3
This, of course, has not gone unnoticed: “The currently prevailing pattern of economic theorizing exhibits the following three characteristics: (1) a syncopated style of argument fluctuating back and forth between literary and symbolic modes of expression, (2) naive translation, or the loose paraphrasing of formulae into sentences, and (3) loose verbal reasoning for certain aspects of theoretical argumentation where explicit symbolic formulation is lacking.” (Dennis, 1982)
From Nick Rowe’s Parable of the Fruit Trees, nothing can be learned about how the price and profit mechanism works. This does not matter, though, because the purpose of economics has never been to clarify matters and to advance science but to keep everything and everybody in the swamp of inconclusiveness.
Vagueness and inconclusiveness protect the scientifically incompetent and secure the status quo because:
• “... you cannot prove a vague theory wrong.” (Feynman)
• “With enough fog emitted, almost anything becomes possible.” (Mirowski)
One will not find a single scientist in the swamp. #4 The swamp has always been the habitat of parable-tellers and cargo cult scientists.
Egmont Kakarot-Handtke
#1 It is better to be precisely right than roughly wrong
#2 “This is a tough question to adjudicate on scientific grounds since the issue is largely definitional and, as Lewis Carroll pointed out, everyone is entitled to his own definitions.” (Blinder)
#3 “’When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’ ‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’ ‘The question is,’ said Humpty Dumpty, ‘which is to be master — that’s all’.”
#4 Getting out of the economics swamp
November 3, 2016
Explaining the real-wage/productivity disconnect
Comment on Editor on ‘Wages not commensurate with labor productivity in the USA’
Blog-Reference
The elementary formula Graphic AXEC45 for the real wage follows from the correct labor market theory.
The formula says that the real wage depends on productivity R and inversely on the expenditure ratio rhoE (the letter rho stands for ratio). The other determinants can be ignored for the moment. The formula gets longer when government and foreign trade are included.
An increase in the expenditure ratio rhoE lowers the real wage and vice versa. An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
The disconnect between real-wage and productivity is explicable to a large extent by the deficit-spending of the household sector and runs in parallel with growing household sector debt. Note that the formula is composed of measurable variables and is therefore testable.
Egmont Kakarot-Handtke
Blog-Reference
The elementary formula Graphic AXEC45 for the real wage follows from the correct labor market theory.
The formula says that the real wage depends on productivity R and inversely on the expenditure ratio rhoE (the letter rho stands for ratio). The other determinants can be ignored for the moment. The formula gets longer when government and foreign trade are included.
An increase in the expenditure ratio rhoE lowers the real wage and vice versa. An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
The disconnect between real-wage and productivity is explicable to a large extent by the deficit-spending of the household sector and runs in parallel with growing household sector debt. Note that the formula is composed of measurable variables and is therefore testable.
Egmont Kakarot-Handtke
September 17, 2016
Micro and macro inconsistency
Comment on Jo Michell on ‘Consistent modelling and inconsistent terminology’
Blog-Reference
“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, 1994, p. 31)
Economics is a failed science because Walrasianism, Keynesianism, Marxianism, and Austrianism are provably inconsistent. This includes Godley’s and Lavoie’s approach. More precisely, Godley’s and Lavoie’s program ― the integrated approach to credit, money, income, production, and wealth ― is basically correct, but at some point, an inconsistency slipped in, and that happened exactly in Section 8.2, p. 262 (Godley et al., 2007).
The inconsistency relates to the definitions of profit (monetary, nonmonetary), distributed profit, retained profit, total income, and the definition of total saving (monetary, nonmonetary). Roughly speaking, monetary profit results from objectively measurable market transactions, nonmonetary profit results from the highly subjective valuation of assets, and these are totally different things (2011b).
The problem of the accounting approach is twofold: (i) as a rule, economists do not understand the elementary mathematics that underlies accounting, which leads to an inconsistent definition of total income and GDP (2012), (ii) the approach is axiomatically incomplete because it defines only the relationships of nominal variables.
All purely nominal models, as well as all purely real models, are false because the economy constitutes itself through the interaction of real AND nominal variables. Therefore, the methodologically correct framework is given by — what Keynes called — the ‘monetary theory of production’.
The overall failure of economics lies in the fact that economists argue from false premises/axioms, that is, Walrasianism in all shapes and forms (DSGE, RBC, AD/AS, etc.) argues from forever unacceptable microfoundations, and Keynesianism in all shapes and forms argues from false macrofoundations. To get out of failed economics requires nothing less than a Paradigm Shift from inconsistent to consistent foundations/axioms.
The correct macrofoundations are shown under the label AXEC137b.
Post/New/After-Keynesians have not realized until this very day that Keynes had messed up the formal foundations of the General Theory (1973, p. 63). The fatal flaw of Keynes’s and Godley’s/Lavoie’s approach is that the underlying profit theory is false (2011a). Clearly, if one gets the foundational concept of economics wrong, all the rest of one’s theory is worthless. The present state of economics is that neither the microfounded Walrasians nor the macrofounded Keynesians have a formally and materially consistent theory of how the market economy works. Because of this, economic policy guidance has ― for more than 200 years ― zero scientific content. This also applies to the shop talk of Jo and Simon.
Egmont Kakarot-Handtke
References
Godley, W., and Lavoie, M. (2007). Monetary Economics. An Integrated Approach to Credit, Money, Income and Wealth. Houndmills, Basingstoke, New York: Palgrave Macmillan.
Kakarot-Handtke, E. (2011a). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2011b). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
Blog-Reference
“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, 1994, p. 31)
Economics is a failed science because Walrasianism, Keynesianism, Marxianism, and Austrianism are provably inconsistent. This includes Godley’s and Lavoie’s approach. More precisely, Godley’s and Lavoie’s program ― the integrated approach to credit, money, income, production, and wealth ― is basically correct, but at some point, an inconsistency slipped in, and that happened exactly in Section 8.2, p. 262 (Godley et al., 2007).
The inconsistency relates to the definitions of profit (monetary, nonmonetary), distributed profit, retained profit, total income, and the definition of total saving (monetary, nonmonetary). Roughly speaking, monetary profit results from objectively measurable market transactions, nonmonetary profit results from the highly subjective valuation of assets, and these are totally different things (2011b).
The problem of the accounting approach is twofold: (i) as a rule, economists do not understand the elementary mathematics that underlies accounting, which leads to an inconsistent definition of total income and GDP (2012), (ii) the approach is axiomatically incomplete because it defines only the relationships of nominal variables.
All purely nominal models, as well as all purely real models, are false because the economy constitutes itself through the interaction of real AND nominal variables. Therefore, the methodologically correct framework is given by — what Keynes called — the ‘monetary theory of production’.
The overall failure of economics lies in the fact that economists argue from false premises/axioms, that is, Walrasianism in all shapes and forms (DSGE, RBC, AD/AS, etc.) argues from forever unacceptable microfoundations, and Keynesianism in all shapes and forms argues from false macrofoundations. To get out of failed economics requires nothing less than a Paradigm Shift from inconsistent to consistent foundations/axioms.
The correct macrofoundations are shown under the label AXEC137b.
Egmont Kakarot-Handtke
References
Godley, W., and Lavoie, M. (2007). Monetary Economics. An Integrated Approach to Credit, Money, Income and Wealth. Houndmills, Basingstoke, New York: Palgrave Macmillan.
Kakarot-Handtke, E. (2011a). The Emergence of Profit and Interest in the Monetary Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2011b). Primary and Secondary Markets. SSRN Working Paper Series, 1917012: 1–26. URL
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Keynes, J. M. (1973). The General Theory of Employment Interest and Money. London, Basingstoke: Macmillan.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield: Edward Elgar.
January 3, 2016
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 more 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 they all have in common is 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 Graphic 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) Wt=Wt-1(1+wt) The wage rate in period t — Wt — is given by the wage rate in the previous period Wt-1 and the rate of change for the current period wt.
(v) Rt=Rt-1(1+rt) analogous for productivity.
(vi) Lt=Lt-1(1+lt) 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:
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 not 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
Related 'Economics as a fool’s paradise'.
No, economists do not understand what is in their models.
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
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.
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 more 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 they all have in common is 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 Graphic 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) Wt=Wt-1(1+wt) The wage rate in period t — Wt — is given by the wage rate in the previous period Wt-1 and the rate of change for the current period wt.
(v) Rt=Rt-1(1+rt) analogous for productivity.
(vi) Lt=Lt-1(1+lt) 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 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 not 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
Related 'Economics as a fool’s paradise'.
***
POINTER on Economist's ViewNo, economists do not understand what is in their models.
***
ANSWER to Bragi on Jan 4This 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
***
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.
***
Graphic AXEC172
December 1, 2015
The Fisher Effect — a specimen of scientific incompetence
Comment on David Glasner on ‘Once Upon a Time When Keynes Endorsed the Fisher Effect’
Blog-Reference
The Fisher Effect is ultimately the result of a design flaw of the monetary order/ institutions. As a rule, the monetary order is not consciously designed but the outcome of piecemeal institutional change in historical time. As we know from biological evolution, this leads regularly to suboptimal outcomes with regard to structure/functionality, which, however, become only visible in hindsight. The cecum is a case in point, but biology is full of weird and suboptimal constructions.
The Fisher Effect should not occur in a well-designed monetary order because it violates the principle of the neutrality of money. To see this clearly, one has to change the methodological perspective.
Our analytical framework is given with the elementary production-consumption economy.* The business sector consists of two firms: one that produces the consumption good, and the other that produces money and credit, which is called the central bank. The central bank stands here for the whole banking industry (for details see 2015, Sec. 7).
For simplicity, only the limiting case of a zero-profit economy is considered. Then, in the consumption goods-producing firm, this condition holds in the most elementary case
(1) Pc X=W Lc
Price Pc times quantity sold X equals wage rate W times labor input Lc. This reduces to the case of market-clearing to
(2) Pc=W/Rc
The market-clearing price is equal to unit wage costs W/Rc, with Rc standing for the productivity in consumption good production.
For the central bank holds
(3) Jo OVD=Jd DEP+W Lb
that is, rate of interest Jo on the asset side (here current overdrafts) times overdrafts OVD equals rate of interest Jd on the liability side (here current deposits) times deposits DEP plus wage rate W times labor input in the banking industry Lb. Strictly speaking, OVD and DEP are the average stocks per period.
Both sides of the central bank's balance sheet are equal, that is, current overdrafts OVD equals current deposits DEP. Current deposits are here identical to the quantity of money. For simplicity, the rate of interest on the liability side Jd, is set to zero. This reduces (3) to
(4) Jo OVD=W Lb
All real variables (labor input, productivity, output, etc) remain unchanged for the time being. The real side is frozen.
In the next period, the wage rate W in (1) and (4), which is here identical for simplicity, is doubled. As a consequence, Pc in (2) doubles under the conditions of market clearing, zero profit, and no real changes.
When W doubles in (4) on the right-hand side, then either Jo or OVD must double on the left-hand side. The correct solution is that the interest rate Jo remains constant, and the asset side = current overdrafts = OVD is doubled. Because both sides of the central bank’s balance sheet are always equal, the liability side = current deposits = DEP = quantity of money has also to be doubled.
In real terms, the situation remains unchanged for all agents. And this is as it should be, according to the neutrality principle. In the historically given monetary order, however, neither the asset nor the liability side of the consolidated balance sheet of the banking industry is properly adapted. Only for this reason, the rate of interest, here Jo in (4), changes.
Therefore, in a well-designed monetary order, the interest rate Jo is like a real variable that remains absolutely constant no matter what the rate of inflation or deflation is. It is, so to speak, the pole star of the economic firmament. The Fisher Effect is only an artifact, a historical accident, a freak phenomenon. In their analysis, neither Fisher nor Keynes ever rises above parochial realism.
This scientific incompetence is — not a matter of ‘once upon a time’ — but the defining characteristic of the representative economist.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
* Graphic AXEC31
ICYMI (comment on Frank Restly of Dec 1 on Dec 2)
The zero profit economy is defined by the absence of profit and loss. And this is, as I clearly stated, a ‘limiting case’ to start with. The general case is discussed in my papers. Please help yourself on SSRN.
I have excluded profit/loss in my post about the Fisher Effect in order to avoid a discussion about profit theory which is defective since Adam Smith. See the post Profit and the collective failure of economists.
I am well aware that a risk-free economy is different from a zero profit economy and that a central bank cannot set both price and quantity. But that is not the issue here. The issue is that the Fisher Effect is ultimately caused by a constructional flaw of the monetary order.
For the other defects see Major Defects of the Market Economy.
ICYMI (comment on Frank Restly of Dec 2 on Dec3)
The representative economist does not understand basic methodological principles. “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.” (Morgenstern, 1941, p. 373)
The zero-profit condition is the simplest condition, therefore it is the correct starting point.
It is the very characteristic of the representative economist that he cannot rigorously focus on one line of argument and that he has the attention span of a goldfish.#1 In my posts you will not find the statement that ‘workers live forever, equipment does not wear out, and accidents and natural disasters do not happen.’
Could it be that you can neither read nor think but only waffle?
By the way, that science is the art of abstraction from irrelevant detail is known since J. S. Mill “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (1874, V.55)
References
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
#1 One entirely sufficient reason for the shutdown of economics.
ICYMI (comment on David Glasner of Dec 2 on Dec 4)
It seems, that not only Frank Restly can neither read nor think.
In eq. (3) of my post of Dec 1 the rate of interest Jd on the central bank's liability side explicitly appears and is subsequently set to zero in order to focus the argument. The rate of interest on financial assets is discussed in my papers on multiple occasions (please help yourself on SSRN).
It should be known by now that it is rather silly to argue that a lot of phenomena are missing in an extremely simplified example and thereby distract from the point at issue.
Note that the introduction of the rate Jd does not change the essential point of my argument. Every serious student can verify this by following the References.
The urgently required New Thinking in economics does not consist in the exegesis of obsolete authors (‘some defunct economist’ in Keynes’s apt terminology) and in playing old academic games. As Peirce nicely put it on a similar occasion: “[The pragmatist] is none of those overcultivated Oxford dons — I hope their day is over — whom any discovery that brought quietus to a vexed question would inevitably vex because it would end the fun of arguing around it and about it and over it.” (1931, 5.520)
References
Peirce, C. S. (1931). Collected Papers of Charles Sanders Peirce, volume I. Cambridge: Harvard University Press. URL
ICYMI (comment on Frank Restly of Dec 3 on Dec 4)
You ask: “Then what exactly do you mean by a zero loss economy?”
I mean exactly that profit/loss is set to zero and thereby taken out of the picture for the time being in order to streamline the argument. This means that I deal with profit/loss on another occasion#1 and by no stretch of a feeble imagination that it escaped my notice that profit/loss occurs in the real world.
What I have shown, indeed, is that the profit theory is false since Adam Smith. If you intend to educate yourself have a look at my website.#2
Did you ever realize that the original Walrasian model (ni bénéfice ni perte) and the original Keynesian model are zero profit economies? [ni bénéfice ni perte = no profit no loss]
In the general case, the overall profit of the business sector as a whole is positive according to the Profit Law Qm≡Yd+I−Sm and in this case, all your objections go up in smoke. The essential point of my post of Dec 1, though, remains unaffected.
#1 Profit and the collective failure of economists
#2 Profit is the key
ICYMI (comment on David Glasner of Dec 5 on Dec 7)
Let us agree that the Fisher effect is about (i) the difference between nominal and real interest rates and (ii) that there are many real interest rates because there are many types of real assets.
Here is the Wikipedia definition of the Fisher effect: “...the Fisher effect is the proposition by Irving Fisher that the real interest rate is independent of monetary measures, specifically the nominal interest rate and the expected inflation rate. The term "nominal interest rate" refers to the actual interest rate giving the amount by which a number of dollars or other unit of currency owed by a borrower to a lender grows over time; the term "real interest rate" refers to the amount by which the purchasing power of those dollars grows over time — that is, the real interest rate is the nominal interest rate adjusted for the effect of inflation on the purchasing power of the loan proceeds.
The relation between the nominal and real rates is given by the Fisher equation, which states ... that the real interest rate equals the nominal interest rate minus the expected inflation rate.”
In my example, the lender rate, the borrower rate, and the price of the consumption good appear. What I have shown is that in a well-designed monetary order the rate of interest is constant, no matter what the rate of inflation/deflation is. This means that the concept of expected inflation falls flat and with it the distinction between nominal and real interest rate. Therefore, the Fisher equation as a whole falls flat.
Your answer of Dec 3 is that my example is irrelevant because the expected future price has no effect. False. My example is relevant because it shows that the Fisher equation describes a freak phenomenon that appears because of a flaw in the monetary order.
Now, if there is something fundamentally wrong with the Fisher equation there is no need to go further and to look deeper into the concept of own rates of various real assets.
What seems to be pretty obvious is that neither Fisher nor Keynes got the fundamental economic relationship right. This refers to interest rate/inflation, interest/profit, and profit/income. So there is no need for a lengthy elaboration of the finer points of their confusion.
I agree, let things stay where they stay at the moment. It is certainly much more rewarding to go beyond refuted concepts and authors.
Blog-Reference
The Fisher Effect is ultimately the result of a design flaw of the monetary order/ institutions. As a rule, the monetary order is not consciously designed but the outcome of piecemeal institutional change in historical time. As we know from biological evolution, this leads regularly to suboptimal outcomes with regard to structure/functionality, which, however, become only visible in hindsight. The cecum is a case in point, but biology is full of weird and suboptimal constructions.
The Fisher Effect should not occur in a well-designed monetary order because it violates the principle of the neutrality of money. To see this clearly, one has to change the methodological perspective.
Our analytical framework is given with the elementary production-consumption economy.* The business sector consists of two firms: one that produces the consumption good, and the other that produces money and credit, which is called the central bank. The central bank stands here for the whole banking industry (for details see 2015, Sec. 7).
For simplicity, only the limiting case of a zero-profit economy is considered. Then, in the consumption goods-producing firm, this condition holds in the most elementary case
(1) Pc X=W Lc
Price Pc times quantity sold X equals wage rate W times labor input Lc. This reduces to the case of market-clearing to
(2) Pc=W/Rc
The market-clearing price is equal to unit wage costs W/Rc, with Rc standing for the productivity in consumption good production.
For the central bank holds
(3) Jo OVD=Jd DEP+W Lb
that is, rate of interest Jo on the asset side (here current overdrafts) times overdrafts OVD equals rate of interest Jd on the liability side (here current deposits) times deposits DEP plus wage rate W times labor input in the banking industry Lb. Strictly speaking, OVD and DEP are the average stocks per period.
Both sides of the central bank's balance sheet are equal, that is, current overdrafts OVD equals current deposits DEP. Current deposits are here identical to the quantity of money. For simplicity, the rate of interest on the liability side Jd, is set to zero. This reduces (3) to
(4) Jo OVD=W Lb
All real variables (labor input, productivity, output, etc) remain unchanged for the time being. The real side is frozen.
In the next period, the wage rate W in (1) and (4), which is here identical for simplicity, is doubled. As a consequence, Pc in (2) doubles under the conditions of market clearing, zero profit, and no real changes.
When W doubles in (4) on the right-hand side, then either Jo or OVD must double on the left-hand side. The correct solution is that the interest rate Jo remains constant, and the asset side = current overdrafts = OVD is doubled. Because both sides of the central bank’s balance sheet are always equal, the liability side = current deposits = DEP = quantity of money has also to be doubled.
In real terms, the situation remains unchanged for all agents. And this is as it should be, according to the neutrality principle. In the historically given monetary order, however, neither the asset nor the liability side of the consolidated balance sheet of the banking industry is properly adapted. Only for this reason, the rate of interest, here Jo in (4), changes.
Therefore, in a well-designed monetary order, the interest rate Jo is like a real variable that remains absolutely constant no matter what the rate of inflation or deflation is. It is, so to speak, the pole star of the economic firmament. The Fisher Effect is only an artifact, a historical accident, a freak phenomenon. In their analysis, neither Fisher nor Keynes ever rises above parochial realism.
This scientific incompetence is — not a matter of ‘once upon a time’ — but the defining characteristic of the representative economist.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL
* Graphic AXEC31
***
ICYMI (comment on Frank Restly of Dec 1 on Dec 2)
The zero profit economy is defined by the absence of profit and loss. And this is, as I clearly stated, a ‘limiting case’ to start with. The general case is discussed in my papers. Please help yourself on SSRN.
I have excluded profit/loss in my post about the Fisher Effect in order to avoid a discussion about profit theory which is defective since Adam Smith. See the post Profit and the collective failure of economists.
I am well aware that a risk-free economy is different from a zero profit economy and that a central bank cannot set both price and quantity. But that is not the issue here. The issue is that the Fisher Effect is ultimately caused by a constructional flaw of the monetary order.
For the other defects see Major Defects of the Market Economy.
***
ICYMI (comment on Frank Restly of Dec 2 on Dec3)
The representative economist does not understand basic methodological principles. “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.” (Morgenstern, 1941, p. 373)
The zero-profit condition is the simplest condition, therefore it is the correct starting point.
It is the very characteristic of the representative economist that he cannot rigorously focus on one line of argument and that he has the attention span of a goldfish.#1 In my posts you will not find the statement that ‘workers live forever, equipment does not wear out, and accidents and natural disasters do not happen.’
Could it be that you can neither read nor think but only waffle?
By the way, that science is the art of abstraction from irrelevant detail is known since J. S. Mill “Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (1874, V.55)
References
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Morgenstern, O. (1941). Professor Hicks on Value and Capital. Journal of Political Economy, 49(3): 361–393. URL
#1 One entirely sufficient reason for the shutdown of economics.
***
ICYMI (comment on David Glasner of Dec 2 on Dec 4)
It seems, that not only Frank Restly can neither read nor think.
In eq. (3) of my post of Dec 1 the rate of interest Jd on the central bank's liability side explicitly appears and is subsequently set to zero in order to focus the argument. The rate of interest on financial assets is discussed in my papers on multiple occasions (please help yourself on SSRN).
It should be known by now that it is rather silly to argue that a lot of phenomena are missing in an extremely simplified example and thereby distract from the point at issue.
Note that the introduction of the rate Jd does not change the essential point of my argument. Every serious student can verify this by following the References.
The urgently required New Thinking in economics does not consist in the exegesis of obsolete authors (‘some defunct economist’ in Keynes’s apt terminology) and in playing old academic games. As Peirce nicely put it on a similar occasion: “[The pragmatist] is none of those overcultivated Oxford dons — I hope their day is over — whom any discovery that brought quietus to a vexed question would inevitably vex because it would end the fun of arguing around it and about it and over it.” (1931, 5.520)
References
Peirce, C. S. (1931). Collected Papers of Charles Sanders Peirce, volume I. Cambridge: Harvard University Press. URL
***
ICYMI (comment on Frank Restly of Dec 3 on Dec 4)
You ask: “Then what exactly do you mean by a zero loss economy?”
I mean exactly that profit/loss is set to zero and thereby taken out of the picture for the time being in order to streamline the argument. This means that I deal with profit/loss on another occasion#1 and by no stretch of a feeble imagination that it escaped my notice that profit/loss occurs in the real world.
What I have shown, indeed, is that the profit theory is false since Adam Smith. If you intend to educate yourself have a look at my website.#2
Did you ever realize that the original Walrasian model (ni bénéfice ni perte) and the original Keynesian model are zero profit economies? [ni bénéfice ni perte = no profit no loss]
In the general case, the overall profit of the business sector as a whole is positive according to the Profit Law Qm≡Yd+I−Sm and in this case, all your objections go up in smoke. The essential point of my post of Dec 1, though, remains unaffected.
#1 Profit and the collective failure of economists
#2 Profit is the key
***
ICYMI (comment on David Glasner of Dec 5 on Dec 7)
Let us agree that the Fisher effect is about (i) the difference between nominal and real interest rates and (ii) that there are many real interest rates because there are many types of real assets.
Here is the Wikipedia definition of the Fisher effect: “...the Fisher effect is the proposition by Irving Fisher that the real interest rate is independent of monetary measures, specifically the nominal interest rate and the expected inflation rate. The term "nominal interest rate" refers to the actual interest rate giving the amount by which a number of dollars or other unit of currency owed by a borrower to a lender grows over time; the term "real interest rate" refers to the amount by which the purchasing power of those dollars grows over time — that is, the real interest rate is the nominal interest rate adjusted for the effect of inflation on the purchasing power of the loan proceeds.
The relation between the nominal and real rates is given by the Fisher equation, which states ... that the real interest rate equals the nominal interest rate minus the expected inflation rate.”
In my example, the lender rate, the borrower rate, and the price of the consumption good appear. What I have shown is that in a well-designed monetary order the rate of interest is constant, no matter what the rate of inflation/deflation is. This means that the concept of expected inflation falls flat and with it the distinction between nominal and real interest rate. Therefore, the Fisher equation as a whole falls flat.
Your answer of Dec 3 is that my example is irrelevant because the expected future price has no effect. False. My example is relevant because it shows that the Fisher equation describes a freak phenomenon that appears because of a flaw in the monetary order.
Now, if there is something fundamentally wrong with the Fisher equation there is no need to go further and to look deeper into the concept of own rates of various real assets.
What seems to be pretty obvious is that neither Fisher nor Keynes got the fundamental economic relationship right. This refers to interest rate/inflation, interest/profit, and profit/income. So there is no need for a lengthy elaboration of the finer points of their confusion.
I agree, let things stay where they stay at the moment. It is certainly much more rewarding to go beyond refuted concepts and authors.
November 20, 2015
Complementary time preferences and interest
Comment David Glasner on ‘Thinking about Interest and Irving Fisher’
Blog-Reference
The first rule of economic analysis says that all real models are fundamentally flawed because the economy constitutes itself through the interaction of real and nominal variables, and therefore the proper analytical framework is given by — what Keynes called — the ‘monetary theory of production’.
The most elementary economy is the production-consumption economy, and it consists of the business and the household sector. For a start, the consolidated business sector produces and sells one consumption good. #1
First period: the business sector pays 100 monetary units (€, $, etc. *10exp) as wage income to the household sector, and the household sector spends exactly this amount on the consumption good. There is no saving of the household sector. The business sector’s profit is zero, and the price of the consumption good is equal to unit wage costs. This configuration reproduces itself without any change of the real variables labor input L, productivity R, and output O for an indefinite number of periods.
Second period: one household saves 10 units (S=10) and intends to spend it after 20 periods, i.e., in t+20. If this happens without any dissaving from another household, the business sector makes a loss (Q=−10). The market-clearing price is, in this case, lower than constant unit wage costs.
Since we focus here on pure time preference, we have to make sure that the consumption expenditures of the household sector as a whole do not change. Hence, we need a second household that wants to dissave 10 units (=take up a loan) in this period and to pay it back after 20 periods. What is needed, then, is two households with exactly complementary time preferences.
In real terms, the saver household buys and consumes 10/P real units of the consumption good less in period t and exactly the same quantity more in period t+20. The dissaver household is complementary in real terms. Together, the two households execute a perfectly synchronous nominal and real-time transfer without affecting the rest of the economy. All possible but distracting side effects have been excluded.
The real exchange over time presupposes complementary time preferences. Complementarity is what constitutes the market in the first place. If all households unanimously prefer real consumption now over real consumption in t+x, there is no market for borrowing/lending, to begin with.
In order to focus on time preference alone, risk is excluded. Then, the situation for the saver is this: he may hide the 10 monetary units for 20 periods under his mattress or lend it to the complementary household. On the other side, the dissaver/borrower household needs the 10 units now in order to carry out its plan.
Obviously, the decision of the saver to hand the money over to the borrower has nothing to do with time preference. The saver has to make a second decision between keeping the money under the mattress or lending it (risk-free) to the potential dissaver.
It is this asymmetry that gives rise to the phenomenon of interest and not time preference as such. Time preference relates to the act of saving but not to the act of lending. Both are disconnected in time. And this means that — in principle — Keynes’ liquidity preference is a better explanation for the emergence of consumer interest than Fisher’s time preference (2013). Consumer interest, in turn, is disconnected from the rate of interest that the business sector pays for financing capital investment. Because of this, there is no relationship at all between the households’ time preferences and the so-called marginal productivity of capital (2011).
Methodologically correct thinking leads inescapably to the conclusion that thinking about interest and Irving Fisher is a pointless exercise.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
#1 The elementary interrelation of real and nominal variables in the elementary production-consumption economy is shown with Graphic AXEC31
Related 'How economic thinkers think they think about interest'.
Blog-Reference
The first rule of economic analysis says that all real models are fundamentally flawed because the economy constitutes itself through the interaction of real and nominal variables, and therefore the proper analytical framework is given by — what Keynes called — the ‘monetary theory of production’.
The most elementary economy is the production-consumption economy, and it consists of the business and the household sector. For a start, the consolidated business sector produces and sells one consumption good. #1
First period: the business sector pays 100 monetary units (€, $, etc. *10exp) as wage income to the household sector, and the household sector spends exactly this amount on the consumption good. There is no saving of the household sector. The business sector’s profit is zero, and the price of the consumption good is equal to unit wage costs. This configuration reproduces itself without any change of the real variables labor input L, productivity R, and output O for an indefinite number of periods.
Second period: one household saves 10 units (S=10) and intends to spend it after 20 periods, i.e., in t+20. If this happens without any dissaving from another household, the business sector makes a loss (Q=−10). The market-clearing price is, in this case, lower than constant unit wage costs.
Since we focus here on pure time preference, we have to make sure that the consumption expenditures of the household sector as a whole do not change. Hence, we need a second household that wants to dissave 10 units (=take up a loan) in this period and to pay it back after 20 periods. What is needed, then, is two households with exactly complementary time preferences.
In real terms, the saver household buys and consumes 10/P real units of the consumption good less in period t and exactly the same quantity more in period t+20. The dissaver household is complementary in real terms. Together, the two households execute a perfectly synchronous nominal and real-time transfer without affecting the rest of the economy. All possible but distracting side effects have been excluded.
The real exchange over time presupposes complementary time preferences. Complementarity is what constitutes the market in the first place. If all households unanimously prefer real consumption now over real consumption in t+x, there is no market for borrowing/lending, to begin with.
In order to focus on time preference alone, risk is excluded. Then, the situation for the saver is this: he may hide the 10 monetary units for 20 periods under his mattress or lend it to the complementary household. On the other side, the dissaver/borrower household needs the 10 units now in order to carry out its plan.
Obviously, the decision of the saver to hand the money over to the borrower has nothing to do with time preference. The saver has to make a second decision between keeping the money under the mattress or lending it (risk-free) to the potential dissaver.
It is this asymmetry that gives rise to the phenomenon of interest and not time preference as such. Time preference relates to the act of saving but not to the act of lending. Both are disconnected in time. And this means that — in principle — Keynes’ liquidity preference is a better explanation for the emergence of consumer interest than Fisher’s time preference (2013). Consumer interest, in turn, is disconnected from the rate of interest that the business sector pays for financing capital investment. Because of this, there is no relationship at all between the households’ time preferences and the so-called marginal productivity of capital (2011).
Methodologically correct thinking leads inescapably to the conclusion that thinking about interest and Irving Fisher is a pointless exercise.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
#1 The elementary interrelation of real and nominal variables in the elementary production-consumption economy is shown with Graphic AXEC31
Related 'How economic thinkers think they think about interest'.
November 9, 2015
The irreparable unreality of all ‘real’ models
Comment on David Glasner on ‘The Well-Defined, but Nearly Useless, Natural Rate of Interest’
Blog-Reference
Keynes had a great methodological insight: “In 1933, Keynes wrote a short contribution to a Festschrift for the German economist Arthur Spiethoff. He there attacked classical economists for not providing an adequate monetary theory. He then embarked upon the development of what he termed a monetary theory of production, a theory in which the interdependence of money and uncertainty, and their effects on economic behavior, could be properly investigated.” (Fontana, 2000, p. 40)
Keynes’ insight has been that the proper subject matter of economics is the monetary economy. Many economists have not got this point until today but still maintain that the ‘real’ economy is the real economy. It is definitively not.
And for one simple reason: the phenomenon of profit cannot appear at all in a ‘real’ economy (2011b). Because of this all ‘real’ models miss the essence of the market economy and are a priori worthless. This includes approaches like Ricardo, Sraffa, or RBC. This is Keynes’ lasting contribution to the advancement of theoretical economics: all ‘real’ models have to go out of the window because they are deeply and irreparably flawed.
The real-world economy manifests itself in the interaction of real and nominal variables. Because of this, the theory of saving, investment, and interest have to be developed within the framework of what Keynes called the ‘monetary theory of production’.
The real time travel, i.e. inventory accumulation/decumulation, is entirely disconnected from nominal time travel, i.e. saving/dissaving (2013). The same holds for capital accumulation/decumulation and saving/dissaving. And, most important of all, saving/dissaving is intimately connected with loss/profit. This connection is obviously important, yet it is entirely missing in the familiar theories of interest.
The crucial point is that the representative economist needs to understand what profit is (2011a). Because of this, the theory of interest is false by implication. The worst blunder consists of conceptualizing the natural rate as a real magnitude and in the futile attempt to derive interest from an apples-now-apples-later time preference model.
Egmont Kakarot-Handtke
References
Fontana, G. (2000). Post Keynesians and Circuitists on Money and Uncertainty: An Attempt at Generality. Journal of Post Keynesian Economics, 23(1): 27–48. URL
Kakarot-Handtke, E. (2011a). The Emergence of Profit and Interest in the Monetary
Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2011b). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Related 'Debunking the natural rate of interest' and 'Are economists methodological retards?'.
Blog-Reference
Keynes had a great methodological insight: “In 1933, Keynes wrote a short contribution to a Festschrift for the German economist Arthur Spiethoff. He there attacked classical economists for not providing an adequate monetary theory. He then embarked upon the development of what he termed a monetary theory of production, a theory in which the interdependence of money and uncertainty, and their effects on economic behavior, could be properly investigated.” (Fontana, 2000, p. 40)
Keynes’ insight has been that the proper subject matter of economics is the monetary economy. Many economists have not got this point until today but still maintain that the ‘real’ economy is the real economy. It is definitively not.
And for one simple reason: the phenomenon of profit cannot appear at all in a ‘real’ economy (2011b). Because of this all ‘real’ models miss the essence of the market economy and are a priori worthless. This includes approaches like Ricardo, Sraffa, or RBC. This is Keynes’ lasting contribution to the advancement of theoretical economics: all ‘real’ models have to go out of the window because they are deeply and irreparably flawed.
The real-world economy manifests itself in the interaction of real and nominal variables. Because of this, the theory of saving, investment, and interest have to be developed within the framework of what Keynes called the ‘monetary theory of production’.
The real time travel, i.e. inventory accumulation/decumulation, is entirely disconnected from nominal time travel, i.e. saving/dissaving (2013). The same holds for capital accumulation/decumulation and saving/dissaving. And, most important of all, saving/dissaving is intimately connected with loss/profit. This connection is obviously important, yet it is entirely missing in the familiar theories of interest.
The crucial point is that the representative economist needs to understand what profit is (2011a). Because of this, the theory of interest is false by implication. The worst blunder consists of conceptualizing the natural rate as a real magnitude and in the futile attempt to derive interest from an apples-now-apples-later time preference model.
Egmont Kakarot-Handtke
References
Fontana, G. (2000). Post Keynesians and Circuitists on Money and Uncertainty: An Attempt at Generality. Journal of Post Keynesian Economics, 23(1): 27–48. URL
Kakarot-Handtke, E. (2011a). The Emergence of Profit and Interest in the Monetary
Circuit. SSRN Working Paper Series, 1973952: 1–22. URL
Kakarot-Handtke, E. (2011b). When Ricardo Saw Profit, He Called it Rent: On the Vice of Parochial Realism. SSRN Working Paper Series, 1932119: 1–19. URL
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Related 'Debunking the natural rate of interest' and 'Are economists methodological retards?'.
August 12, 2015
From Hilbert’s hotel to Hilbert’s method
Comment on ‘Infinite Debt, Future Generations, and Hilbert’s Hotel’
Blog-Reference
There are many ways to abuse economics, the three most popular are politics, entertainment, and kindergarten. In the economics kindergarten, they love to play with tiny toy models. And, you know, kids are a bit ad hoc; they start with beer, add the medium of exchange and then IOUs, introduce interest out of the blue, and finalize with the Erlang number. However, what looks like utter confusion is the well-established economic method: “... twentieth-century neoclassical theory resembles nothing so much as the child's game of Mr. Potatohead — the fun comes in mixing and matching components with little or no concern for the coherence of the final profile.” (Mirowski, 1995, p. 294)
Coherence and consistency were never the strong points of the representative economist (2013). But infinite gallimaufry is the privilege of the philosophical economist.
It should be, first of all, clear that there is no such thing as a ‘real’ economy. Because the economy comes into being as the interaction of real and nominal variables, all real models are garbage — even beer models. Second, in economics, infinity should not be used to push a problem out of sight. It is silly to argue that debt is not a problem if it never has to be redeemed.
Hilbert’s hotel is a fine example of all that is wrong with economics. The irony is that Hilbert was the most famous proponent of the correct scientific method, which came to be known as the axiomatic-deductive method. It works as follows.
“When we assemble the facts of a definite, more-or-less comprehensive field of knowledge, we soon notice that these facts are capable of being ordered. This ordering always comes about with the help of a certain framework of concepts... The framework of concepts is nothing other than the theory of the field of knowledge. ... If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework. ... The procedure of the axiomatic method, as it is expressed here, amounts to a deepening of the foundations of the individual domains of knowledge — a deepening that is necessary for every edifice that one wishes to expand and to build higher while preserving its stability.” (Hilbert, 2005, pp. 1107-1109)
Needless to say that Hilbert’s method has never been applied properly by either orthodox or heterodox economists. Both camps are still stuck with the ‘child's game of Mr. Potatohead.’ This explains why economics is a failed science.
The fundamental mistake in the actual discussion of debt is that the pivotal relationship between increase/decrease of debt and profit/loss is entirely missing. For the correct theory see (2014).
Egmont Kakarot-Handtke
References
Hilbert, D. (2005). Axiomatic Thought. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Vol. II, 1107–1115. Oxford, New York: Oxford University Press.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
Blog-Reference
There are many ways to abuse economics, the three most popular are politics, entertainment, and kindergarten. In the economics kindergarten, they love to play with tiny toy models. And, you know, kids are a bit ad hoc; they start with beer, add the medium of exchange and then IOUs, introduce interest out of the blue, and finalize with the Erlang number. However, what looks like utter confusion is the well-established economic method: “... twentieth-century neoclassical theory resembles nothing so much as the child's game of Mr. Potatohead — the fun comes in mixing and matching components with little or no concern for the coherence of the final profile.” (Mirowski, 1995, p. 294)
Coherence and consistency were never the strong points of the representative economist (2013). But infinite gallimaufry is the privilege of the philosophical economist.
It should be, first of all, clear that there is no such thing as a ‘real’ economy. Because the economy comes into being as the interaction of real and nominal variables, all real models are garbage — even beer models. Second, in economics, infinity should not be used to push a problem out of sight. It is silly to argue that debt is not a problem if it never has to be redeemed.
Hilbert’s hotel is a fine example of all that is wrong with economics. The irony is that Hilbert was the most famous proponent of the correct scientific method, which came to be known as the axiomatic-deductive method. It works as follows.
“When we assemble the facts of a definite, more-or-less comprehensive field of knowledge, we soon notice that these facts are capable of being ordered. This ordering always comes about with the help of a certain framework of concepts... The framework of concepts is nothing other than the theory of the field of knowledge. ... If we consider a particular theory more closely, we always see that a few distinguished propositions of the field of knowledge underlie the construction of the framework of concepts, and these propositions then suffice by themselves for the construction, in accordance with logical principles, of the entire framework. ... The procedure of the axiomatic method, as it is expressed here, amounts to a deepening of the foundations of the individual domains of knowledge — a deepening that is necessary for every edifice that one wishes to expand and to build higher while preserving its stability.” (Hilbert, 2005, pp. 1107-1109)
Needless to say that Hilbert’s method has never been applied properly by either orthodox or heterodox economists. Both camps are still stuck with the ‘child's game of Mr. Potatohead.’ This explains why economics is a failed science.
The fundamental mistake in the actual discussion of debt is that the pivotal relationship between increase/decrease of debt and profit/loss is entirely missing. For the correct theory see (2014).
Egmont Kakarot-Handtke
References
Hilbert, D. (2005). Axiomatic Thought. In W. Ewald (Ed.), From Kant to Hilbert. A Source Book in the Foundations of Mathematics, Vol. II, 1107–1115. Oxford, New York: Oxford University Press.
Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series, 2207598: 1–16. URL
Kakarot-Handtke, E. (2014). Mathematical Proof of the Breakdown of Capitalism. SSRN Working Paper Series, 2375578: 1–21. URL
Mirowski, P. (1995). More Heat than Light. Cambridge: Cambridge University Press.
For more about Hilbert see AXECquery.
***
Twitter Nov 28, 2021 Privatdozent David Hilbert's influence on economics
August 11, 2015
Accounting matters
Comment on ‘Accounting for ****’
Blog-Reference
Since theories have an architectonic structure it is clear that if there is a fault in the formal foundations the whole superstructure is bound to collapse eventually. Accounting matters because it provides the natural reality check for economic theories; it plays the same role in economics as a sophisticated measuring instrument in physics.
The first thing to realize is that there is no such thing as a ‘real’ economy. Hence economic phenomena are only explicable as the outcome of the interaction of real and nominal variables. A good number of nominal variables reappear in national accounting.
With regard to saving this means that all ‘real’ models of intertemporal shifting of consumption are pointless. In the monetary economy, the process of saving and dissaving is independent of real output in different periods.
For the correct theory of saving/dissaving see (2013).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Relates to Unaccountable
Blog-Reference
Since theories have an architectonic structure it is clear that if there is a fault in the formal foundations the whole superstructure is bound to collapse eventually. Accounting matters because it provides the natural reality check for economic theories; it plays the same role in economics as a sophisticated measuring instrument in physics.
The first thing to realize is that there is no such thing as a ‘real’ economy. Hence economic phenomena are only explicable as the outcome of the interaction of real and nominal variables. A good number of nominal variables reappear in national accounting.
With regard to saving this means that all ‘real’ models of intertemporal shifting of consumption are pointless. In the monetary economy, the process of saving and dissaving is independent of real output in different periods.
For the correct theory of saving/dissaving see (2013).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2013). Settling the Theory of Saving. SSRN Working Paper Series, 2220651: 1–23. URL
Relates to Unaccountable
August 2, 2015
Modern Moronomic Theory
Comment on Bill Mitchell's ‘Saturday Quiz ― August 1, 2015 ― answers and discussion’
Blog-Reference
The fundamental flaw of your argument is to take National Accounting at face value. With this, you, unfortunately, share a logical error with standard economics that is ultimately fatal for MMT. The root cause of the accounting error/mistake is a complete lack of understanding of what profit is. Total income is NOT the sum of wage income and profit but of wage income and distributed profit (2013). The conceptual error carries over to National Accounting (2012).
Already your first equation GDP=C+I+G+(X−M) is logically defective and by consequence the rest of your argument. This holds in particular for the sectoral balances equation (I−S)+(G−T)+(X−M)=0 which boils for the most elementary case down to Keynes' I=S (Keynes, 1973, p. 63).
To make it short, what, then, is the — minimal, objective, consistent, testable — common conceptual ground of all of the economics?
Total period income in the elementary production-consumption economy with only one giant firm is given by the sum of wage income and distributed profit, i.e. (1) Y=Yw+Yd. Total consumption expenditures are equal to the product of price and quantity sold, i.e. (2) C=PX. That's all for a start.
Monetary profit of the business sector as a whole is then defined as the difference between consumption expenditures and wage costs, i.e. Q≡C−Yw. Monetary saving of the household sector is then defined as the difference between total income and consumption expenditure S≡Y−C. Hence, S≡−Q if, for a start, Yd=0. In simple words: saving S is equal to loss −Q, or, dissaving −S is equal to profit Q. From this follows immediately that all I=S or IS-LM models are false — irrevocably in all eternity.
Generally speaking, it holds for the elementary production-consumption economy that Qre≡−S, i.e. retained profit Qre is equal to dissaving −S. And for the investment economy holds Qre≡I−S, i.e. retained profit is equal to the difference between investment and saving (for details see 2014).
There is no need at the moment to include net government spending and the trade balance. It suffices to prove that already the elementary macroeconomic accounting equations are defective.
Because the MMT profit theory is false, the theory of money and all the rest are false. (2015, Sec. 7).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
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.
Blog-Reference
The fundamental flaw of your argument is to take National Accounting at face value. With this, you, unfortunately, share a logical error with standard economics that is ultimately fatal for MMT. The root cause of the accounting error/mistake is a complete lack of understanding of what profit is. Total income is NOT the sum of wage income and profit but of wage income and distributed profit (2013). The conceptual error carries over to National Accounting (2012).
Already your first equation GDP=C+I+G+(X−M) is logically defective and by consequence the rest of your argument. This holds in particular for the sectoral balances equation (I−S)+(G−T)+(X−M)=0 which boils for the most elementary case down to Keynes' I=S (Keynes, 1973, p. 63).
To make it short, what, then, is the — minimal, objective, consistent, testable — common conceptual ground of all of the economics?
Total period income in the elementary production-consumption economy with only one giant firm is given by the sum of wage income and distributed profit, i.e. (1) Y=Yw+Yd. Total consumption expenditures are equal to the product of price and quantity sold, i.e. (2) C=PX. That's all for a start.
Monetary profit of the business sector as a whole is then defined as the difference between consumption expenditures and wage costs, i.e. Q≡C−Yw. Monetary saving of the household sector is then defined as the difference between total income and consumption expenditure S≡Y−C. Hence, S≡−Q if, for a start, Yd=0. In simple words: saving S is equal to loss −Q, or, dissaving −S is equal to profit Q. From this follows immediately that all I=S or IS-LM models are false — irrevocably in all eternity.
Generally speaking, it holds for the elementary production-consumption economy that Qre≡−S, i.e. retained profit Qre is equal to dissaving −S. And for the investment economy holds Qre≡I−S, i.e. retained profit is equal to the difference between investment and saving (for details see 2014).
There is no need at the moment to include net government spending and the trade balance. It suffices to prove that already the elementary macroeconomic accounting equations are defective.
Because the MMT profit theory is false, the theory of money and all the rest are false. (2015, Sec. 7).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). The Common Error of Common Sense: An Essential Rectification of the Accounting Approach. SSRN Working Paper Series, 2124415: 1–23. URL
Kakarot-Handtke, E. (2013). Debunking Squared. SSRN Working Paper Series, 2357902: 1–5. URL
Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL
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.
July 28, 2015
Stop guessing, start thinking
Comment on David Ruccio on ‘The guessing game’
Blog-Reference
The guessing about the effects of minimum wages makes it clear to everyone that economists lack the correct labor market theory or, even worse, the correct theory of the interaction of markets.
The acceptance of the supply-demand-equilibrium depiction by the majority of economics students can be taken as proof that you can sell whatever green cheese assumption you may dream up to substandard thinkers.
The first task of Heterodoxy is to discard NONENTITIES like utility or equilibrium and to fully replace the supply-demand-cross as the representation of a market (2015b).
The second task is to determine the systemic interaction between the product and the labor market and the key drivers of overall employment (2015a).
After the vertical differentiation of the product and the labor market, the next task is the horizontal differentiation to an arbitrary number of products and labor markets (2014).
To recall, Keynes's main issue was employment theory, and he was quite clear that orthodox employment theory was defective. However, Keynes succeeded only partly; his employment theory is not general either and misses a crucial feature (2012). The most elementary version of the correct Employment Law is given with Graphic AXEC62
Blog-Reference
The guessing about the effects of minimum wages makes it clear to everyone that economists lack the correct labor market theory or, even worse, the correct theory of the interaction of markets.
The acceptance of the supply-demand-equilibrium depiction by the majority of economics students can be taken as proof that you can sell whatever green cheese assumption you may dream up to substandard thinkers.
The first task of Heterodoxy is to discard NONENTITIES like utility or equilibrium and to fully replace the supply-demand-cross as the representation of a market (2015b).
The second task is to determine the systemic interaction between the product and the labor market and the key drivers of overall employment (2015a).
After the vertical differentiation of the product and the labor market, the next task is the horizontal differentiation to an arbitrary number of products and labor markets (2014).
To recall, Keynes's main issue was employment theory, and he was quite clear that orthodox employment theory was defective. However, Keynes succeeded only partly; his employment theory is not general either and misses a crucial feature (2012). The most elementary version of the correct Employment Law is given with Graphic AXEC62
From this follows inter alia:
(i) An increase in the expenditure ratio ρE leads to higher employment.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment. This implies that a higher average wage rate W leads to higher employment. This explains the original Phillips curve.
(iv) A price increase is conducive to lower employment. This explains stagflation.
Consisting exclusively of measurable variables, the structural Employment Law can be tested. So there is no need to continue the silly guessing game, as the main occupation of substandard thinkers.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Truly General Theory of Employment: How Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25. URL
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
(i) An increase in the expenditure ratio ρE leads to higher employment.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase in the factor cost ratio ρF≡W/PR leads to higher employment. This implies that a higher average wage rate W leads to higher employment. This explains the original Phillips curve.
(iv) A price increase is conducive to lower employment. This explains stagflation.
Consisting exclusively of measurable variables, the structural Employment Law can be tested. So there is no need to continue the silly guessing game, as the main occupation of substandard thinkers.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster. SSRN Working Paper Series, 2130421: 1–19. URL
Kakarot-Handtke, E. (2014). The Truly General Theory of Employment: How Keynes Could Have Succeeded. SSRN Working Paper Series, 2406891: 1–25. URL
Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Employment. SSRN Working Paper Series, 2576867: 1–11. URL
Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: The Market. SSRN Working Paper Series, 2547098: 1–10. URL
July 27, 2015
What comes after debunking?
Comment on Lars Syll on ‘Why Real Business Cycle models can’t be taken seriously’
Blog-Reference and Blog-Reference
Orthodoxy is a failure and even laypersons understand intuitively that the behavior of the economy as a whole cannot be explained by the behavioral assumption of constrained optimization of individual agents. This has been a non-starter since Jevons-Walras-Menger and Heterodoxy have always said so. Yet, the question is not how this ‘pure nonsense’ ‘could be awarded The Sveriges Riksbank Prize in Economic Sciences’ but why traditional Heterodoxy could not produce something better than this ridiculous specimen of proto-science?
Orthodoxy is long dead but it has not been buried. Why is this scientific zombie (Quiggin, 2010) still around?
“The main reason for the considerable acceptance of the approach is that fundamental rule of scientific combat: it takes a theory to beat a theory. No amount of skepticism about the fertility of a theory can deter its use unless the skeptic can point to another route by which the scientific problem of regulation can be studied successfully.” (Stigler, 1983, p. 541)
So, this is the pork-barrel deal: Orthodoxy does not vanish because of proven scientific incompetence but only if Heterodoxy presents something better.
To do them a favor is the pleasant duty of Constructive Heterodoxy. Let us throw out the ‘real’ business cycle by advancing to the interaction of nominal and real variables which constitutes the business cycle of the economy we happen to live in (2012).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Intertwined Real and Monetary Stochastic Business Cycles. SSRN Working Paper Series, 2173528: 1–27. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL
Blog-Reference and Blog-Reference
Orthodoxy is a failure and even laypersons understand intuitively that the behavior of the economy as a whole cannot be explained by the behavioral assumption of constrained optimization of individual agents. This has been a non-starter since Jevons-Walras-Menger and Heterodoxy have always said so. Yet, the question is not how this ‘pure nonsense’ ‘could be awarded The Sveriges Riksbank Prize in Economic Sciences’ but why traditional Heterodoxy could not produce something better than this ridiculous specimen of proto-science?
Orthodoxy is long dead but it has not been buried. Why is this scientific zombie (Quiggin, 2010) still around?
“The main reason for the considerable acceptance of the approach is that fundamental rule of scientific combat: it takes a theory to beat a theory. No amount of skepticism about the fertility of a theory can deter its use unless the skeptic can point to another route by which the scientific problem of regulation can be studied successfully.” (Stigler, 1983, p. 541)
So, this is the pork-barrel deal: Orthodoxy does not vanish because of proven scientific incompetence but only if Heterodoxy presents something better.
To do them a favor is the pleasant duty of Constructive Heterodoxy. Let us throw out the ‘real’ business cycle by advancing to the interaction of nominal and real variables which constitutes the business cycle of the economy we happen to live in (2012).
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2012). Intertwined Real and Monetary Stochastic Business Cycles. SSRN Working Paper Series, 2173528: 1–27. URL
Quiggin, J. (2010). Zombie Economics. How Dead Ideas Still Walk Among Us. Princeton, Oxford: Princeton University Press.
Stigler, G. J. (1983). Nobel Lecture: The Process and Progress of Economics. Journal of Political Economy, 91(4): 529–545. URL
March 25, 2014
Profit for Marxists {56}
Working paper at SSRN
Working paper at ARCHIVE
Abstract Marxian economics and standard economics are widely different yet they share a central weakness: the respective profit theories are demonstrably false - each one in its own characteristic way. Roughly speaking, Marx tried to explain profit by objective factors while standard economics cites subjective factors. For different reasons, neither route led to satisfactory results. The conclusion is straightforward: one has to do better. The conceptual consequence is to first reconstruct the profit theory from a solid basis with no regard to either Marxian or standard premises. To succeed, objective-structural axioms have to be taken as a formal point of departure.
Abstract Marxian economics and standard economics are widely different yet they share a central weakness: the respective profit theories are demonstrably false - each one in its own characteristic way. Roughly speaking, Marx tried to explain profit by objective factors while standard economics cites subjective factors. For different reasons, neither route led to satisfactory results. The conclusion is straightforward: one has to do better. The conceptual consequence is to first reconstruct the profit theory from a solid basis with no regard to either Marxian or standard premises. To succeed, objective-structural axioms have to be taken as a formal point of departure.
March 11, 2013
The calculating auctioneer, enlightened wage setters, and the fingers of the Invisible Hand {40}
Working paper at SSRN
Working paper at ARCHIVE
Abstract The formal foundations of theoretical economics must be nonbehavioral and epitomize the interdependence of real and nominal variables that constitutes the monetary economy. This is a cogent conclusion from the persistent collapse of behavioral and real models. Conceptual rigor demands, first, to take objective-structural axioms as a formal point of departure and, secondly, to clarify the interrelations of the fundamental concepts of income and profit. The present paper reconstructs the characteristic properties of a Walrasian economy in structural axiomatic terms, generalizes them, and explores the consequences for our understanding of the working of the economy we happen to live in.
Abstract The formal foundations of theoretical economics must be nonbehavioral and epitomize the interdependence of real and nominal variables that constitutes the monetary economy. This is a cogent conclusion from the persistent collapse of behavioral and real models. Conceptual rigor demands, first, to take objective-structural axioms as a formal point of departure and, secondly, to clarify the interrelations of the fundamental concepts of income and profit. The present paper reconstructs the characteristic properties of a Walrasian economy in structural axiomatic terms, generalizes them, and explores the consequences for our understanding of the working of the economy we happen to live in.
February 22, 2013
Settling the theory of saving {38}
Working paper at SSRN
Working paper at ARCHIVE
Abstract There is no way around it: each theory rests on a tiny set of foundational propositions. Standard economics rests on behavioral axioms. After a long intellectual detour, it should be clear by now that behavioral axioms are the wrong formal departure point. Being beyond repair, they have to be replaced by objective structural axioms. This paper deals with saving and its relation to investment and profit. It starts with the fact that there is no such thing as a 'real' economy. Hence economic phenomena are only explicable as the outcome of the interaction of real and nominal variables.
Abstract There is no way around it: each theory rests on a tiny set of foundational propositions. Standard economics rests on behavioral axioms. After a long intellectual detour, it should be clear by now that behavioral axioms are the wrong formal departure point. Being beyond repair, they have to be replaced by objective structural axioms. This paper deals with saving and its relation to investment and profit. It starts with the fact that there is no such thing as a 'real' economy. Hence economic phenomena are only explicable as the outcome of the interaction of real and nominal variables.
November 11, 2012
Intertwined real and monetary stochastic business cycles {36}
Working paper at SSRN
Working paper at ARCHIVE
Abstract There is no such thing as a ‘real’ economy. The task, therefore, is to consistently reconstruct the fluctuations of employment and output from the interactions of real and nominal variables. The present paper does exactly this. No nonempirical concepts like utility, equilibrium, rationality, decreasing returns or perfect competition are applied. The analysis runs rigorously in objective structural axiomatic terms. Therefrom follows that it is the factor cost ratio, i.e. the relation of the nominal variables wage rate and price and the real variable productivity that, for any given level of effective demand, drives the fluctuations of employment and output.
Working paper at ARCHIVE
Abstract There is no such thing as a ‘real’ economy. The task, therefore, is to consistently reconstruct the fluctuations of employment and output from the interactions of real and nominal variables. The present paper does exactly this. No nonempirical concepts like utility, equilibrium, rationality, decreasing returns or perfect competition are applied. The analysis runs rigorously in objective structural axiomatic terms. Therefrom follows that it is the factor cost ratio, i.e. the relation of the nominal variables wage rate and price and the real variable productivity that, for any given level of effective demand, drives the fluctuations of employment and output.
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