December 18, 2011

The emergence of profit and interest in the monetary circuit {25}

Working paper at SSRN

Abstract  Efficient progress of the monetary theory of production (MTP) is hampered by an unsatisfactory account of how profit and interest emerge in the monetary circuit. As matter of fact, this question puzzled already the classics. It seems evident that it cannot be answered by applying the usual tools. The present paper's purpose is to overcome the deadlock. This is done by setting the circulation approach on general structural axiomatic foundations.

December 12, 2011

Trade, Productivity, Income, and Profit: The Comparative Advantage of Structural Axiomatic Analysis {24}

The classical case of comparative advantage is put into a new formal framework, that is, the behavioral axioms of standard economics are replaced by a set of structural axioms. This enables a comprehensive analysis that takes the effects on income and profit explicitly into account. The axioms in combination with the conditions of market clearing, budget balancing, and initial zero profit determine all measurable variables objectively. It is the purpose of the present paper to formally restate the notion of comparative advantage and to ascertain whether this leads to a well-grounded new perspective on this time-honored doctrine.

November 30, 2011

Why Post Keynesianism is not yet a science {23}

Working Paper at SSRN

Abstract  In a programmatic article Alfred Eichner explained, from a Post Keynesian perspective, why neoclassical economics is not yet a science. This was some time ago and one would expect that Post Keynesianism, with a heightened awareness of scientific standards, has done much better than alternative approaches in the meantime. There is wide agreement that this is not the case. Explanations, though, differ widely. The present — strictly formal — inquiry identifies an elementary logical flaw. This strengthens the argument that the Post Keynesian motto ‘it is better to be roughly right than precisely wrong!’ is methodologically indefensible.

November 3, 2011

The value of water and diamonds: back to square one {22}

Working paper at SSRN

Abstract  Taking the water—diamond paradox as a time-honored challenge, at first the structural value theorem is derived from the set of structural axioms. This enables a reevaluation of classical and neoclassical conceptions. Ricardo realized that there are two entirely different kinds of markets but excluded the secondary markets by defining commodity in a restricted sense. Walras's markets are secondary markets by construction. Primary markets thereby drop from sight. Since secondary markets presuppose primary markets the marginalistic approach is hanging in the air. The structural axiomatic approach demonstrates that the pricing in primary and secondary markets depends on different principles.

October 21, 2011

Matter matters: productivity, profit, and non-marginal factor prices {21}

Working paper at SSRN

Abstract  Tastes and technology are the ultimate givens of standard economics. Their interaction is mediated by the marginal principle. This approach is unsuitable to explain the nature and magnitude of overall profit and its distribution within the business sector. The present paper, therefore, takes a quite different analytical route. The standard behavioral axioms are replaced by objective structural axioms and the standard production function is replaced by a sequential production function. From this new formal basis two exemplary factor prices, the product price, and the real wage are derived under the conditions of market clearing and equal profit ratios.

October 12, 2011

The Propensity Function as general formalization of Economic Man/Woman {20}

Working paper at SSRN

Abstract  The present paper demonstrates how the interaction of the structural axiomatic core and the behavioral propensity function produces dynamically stable outcomes in the product market. The propensity function is a compact formal expression of random, semi-random, and deterministic behavioral assumptions. Its two components are direction and magnitude of the rate of change of an elementary axiomatic variable. A type-C propensity function is the formal container for a familiar conception that is known as qualitative prediction. In a random environment, two type-C functions are sufficient to produce stochastic stability and optimality in the product market. The propensity function is truly general.

For the complete set of foundational equations — structural axioms, definitions, and behavioral propensity function — see Wikimedia AXEC61

October 7, 2011

The wine maker's business and the logical origin of interest in the monetary economy {19}

Working paper at SSRN

Abstract  Any serious alternative to the standard approach requires a distinct axiomatic foundation. The crucial point is not axiomatization per se but the real-world content of axioms. The purpose of the present paper is to make the implications of the objective structural axiom set concerning the relation of profit, money, the nominal/real rate of interest, and the time structure of production explicit and to contrast them with the familiar conceptions.

September 23, 2011

When Ricardo saw profit, he called it rent: on the vice of parochial realism {18}

Working paper at SSRN

Abstract  According to Ricardo the principal problem in Political Economy is to determine the laws which regulate the distribution of profits, rents, and wages. Ricardo determined the respective shares in real terms and to this end invented an engine of analysis that became paradigmatic. The present paper applies a consistent real and monetary analysis, which is based on a set of objective structural axioms and contrasts the results with Ricardo's approach. The general result is that real analysis misses economic reality. The specific result is that rent is a misnomer for the distributed profit of the landowning firm.

September 7, 2011

Geometrical exposition of structural axiomatic economics (II): qualitative and temporal aggregation {17}

Working paper at SSRN

Abstract  Behavioral assumptions are not solid enough to be eligible as first principles of theoretical economics. Hence all endeavors to lay the formal foundation on a new site and at a deeper level actually need no further vindication. Part (I) of the structural axiomatic analysis submits three nonbehavioral axioms as groundwork and applies them to the simplest possible case of the pure consumption economy. The geometrical analysis makes the interrelations between income, profit, and employment under the conditions of market clearing and budget-balancing immediately evident. Part (II) applies the differentiated axiom set to the analysis of qualitative and temporal aggregation.

September 3, 2011

Increasing returns and stability {16}

Working paper at SSRN

Abstract  Increasing returns are an incontrovertible fact since Adam Smith hailed them as the very originators of wealth, yet they play havoc with general equilibrium. They fit, in marked contrast, nicely into the structural axiomatic framework. This indicates that it is worthwhile to replace the behavioral axioms of standard economics with objective structural axioms. These are in the present paper applied to the question of how increasing returns affect the systemic interrelations in the pure consumption economy. To invite a reality check the logical implications of the structural Employment Law are set in relation to three well-known statistical relationships.

August 26, 2011

Primary and secondary markets {15}

Working paper at SSRN

Abstract  This paper swaps the standard behavioral axioms for structural axioms and applies the latter to the analysis of the emergence of secondary markets from the flow part of the economy. Real and nominal residuals at first give rise to the accumulation of the stock of money and the stock of commodities. These stocks constitute the demand and supply side of secondary markets. The pricing in these markets is different from the pricing in the primary markets. Realized appreciation in the secondary markets is different from income or profit. To treat primary and secondary markets alike is therefore a category mistake.

August 18, 2011

Squaring the Investment Cycle {14}

The present paper replaces the standard behavioral axioms by structural axioms and applies these to the analysis of the accumulation and decumulation of capital. This yields a coherent view of the interrelations of real and nominal saving–investment, of profit–loss, of money–credit, and of internal–external financing. The main result is that asymmetric growth is indispensable for the viability of the market system. An equilibrium of saving and investment would be rather disadvantageous for the business sector.

August 8, 2011

Uniform profit ratios {13}

Working paper at SSRN

Abstract  The equalization of profit rates as the outcome of free competition is one of the oldest tenets in theoretical economics. Being intuitively convincing its premises and implications, though, are not well defined. As Walras put it: ‘To state a theory is one thing; to prove it is another.’ First of all, a consistent concept of profit is required. In the present paper, the structural axiom set is taken as premise. Thereof the determinants of profit and the profit ratio follow. This makes it possible to definitively state the conditions for uniform profit ratios in a hierarchical market structure.

August 2, 2011

Reconstructing the Quantity Theory (II) {12}

Part I and II of the present paper reconstruct the quantity theory from structural axiomatic foundations. This yields a coherent view of the interrelations of quantity of money, transaction money, saving–dissaving, liquidity–illiquidity, rates of interest, leverage, allocation of labor, prices, profits, and employment. Part II focuses on the symmetric and asymmetric process of nominal and real saving–dissaving and on the monetization of nonfinancial assets. The distinction between liquidity preferences of individual households and the household sector as a whole proves to be crucial. From the objective structural axiom set follows a structural inflation formula.

July 26, 2011

Reconstructing the Quantity Theory (I) {11}

The quantity theory is disjunct to the hardcore of general equilibrium theory. It does not relate to the formal foundations of standard economics and, vice versa, from the behavioral axioms of standard economics a rationale for using money cannot be derived. The present paper leaves the standard axioms aside and reconstructs the quantity theory from entirely new structural axiomatic foundations. This yields a coherent view of the interrelations of quantity of money, transaction money, saving-dissaving, liquidity-illiquidity, rates of interest, leverage, allocation, prices, profits, unit of account, and employment.

July 14, 2011

Unemployment out of nowhere {10}

Working paper at SSRN

Abstract  Unemployment is usually explained with reference to the equilibrium of supply and demand in the labor market. This approach rests on specific behavioral assumptions that are formally expressed as axioms. The standard set of axioms is replaced in the present paper by a set of structural axioms. This approach yields the objective determinants of employment. They consist of effective demand, the actual outcome of price formation, structural stress as determined by the heterogeneity within the business sector, and the income distribution. Sudden changes in employment are effected by latent relative switchers that are hard to spot empirically.

June 22, 2011

Exploitation and its unintended outcomes: an axiomatic view of Marx's surplus value {09}

Working paper at SSRN

Abstract  The present paper scrutinizes the logical foundation of Marx's dialectic analysis of the evolving money economy. The frame of reference is thereby given with the set of structural axioms. It turns out, first, that the commonplace notion of exploitation has to be replaced by crossover exploitation among capitalists and workers; second, that the concept of surplus-value cannot explain the existence and magnitude of overall profits; finally, that the real shares of output are determined in the spheres of income and expenditure and not, as classical, Marxian and neoclassical economists unanimously maintain, in the sphere of production.

June 14, 2011

Properties of an Economy Without Human Beings {08}

Standard economics starts with behavioral axioms and arrives at conclusions about the equilibrium properties of the economy as a whole at point t. The present paper employs objective structural axioms and random changes in order to determine the conditions for market-clearing and budget-balancing in the pure consumption economy until the limit t → ∞. From the conditions of stochastic supersymmetry, six simple behavioral rules are derived that guarantee the desired outcome. These rules contrast with actual behavior and this explains why the plans and expectations of economic man are many times frustrated.

June 6, 2011

The coherency of money, profit, price, and distribution {07}

Working paper at SSRN

Abstract  When anything goes and nothing fits together this can be euphemized as pluralism. Lacking a common point of reference, discussions between various schools of economic thought proceed in the ‘hyperspace of assumptions’ (McCloskey). The incoherency of perspectives is due to self-chosen foundational assumptions. The present paper submits three structural axioms as formal core that is neutral with regard to assumptions about behavior. The objective is to clarify the interrelation of four elementary concepts and to eliminate some logical inconsistencies. Neither neoclassicals nor Keynesians came to grips with the relationship between profit and the distribution of the real product.

June 2, 2011

Beginning, crises, and end of the money economy {06}

Working paper at SSRN

Abstract  A crisis is but a crisis when the long-run outlook is definitively positive. Then a lower turning point must exist. This implicates a vision or, in the ideal case, a formalized theory of the money economy's possible end states. This theory has to provide an endogenous explanation of end states and crises. The equilibrium approach excludes endogenous causes in principle. Thus disturbances can only be explained by exogenous random shocks. The structural axiomatic approach, which is applied in the following, consistently defines the potential systemic crisis point and the conditions of an economic happy end.

May 23, 2011

What is wrong with heterodox economics? Kalecki's profit theory as an example {05}

Working paper at SSRN

Abstract  Kalecki’s profit theory has always been popular among heterodox economists as an alternative approach to solve the paradox of monetary profits. In the present paper, his formula ‘The workers spend what they get, the capitalists get what they spend’ is scrutinized for its logical and factual implications. The analysis shows that Kalecki’s alternative approach points in the right direction but unfortunately shares a crucial conceptual error with standard economics.

May 22, 2011

Schumpeter and the essence of profit {04}

Working paper at SSRN

Abstract  Schumpeter had a clear vision of the developing economy, but he did not formalize it. The quest for a germane formal basis is in the following guided by the general question: what is the minimum set of foundational propositions for a consistent reconstruction of the evolving money economy? We start with three structural axioms. The claim of generality entails that it should be possible to free Schumpeter's approach from its irksome Walrasian legacy and to give a consistent formal account of the elementary circular flow that served him as a backdrop for the analysis of the entrepreneur-driven market system.

May 19, 2011

The Pure Logic of Value, Profit, Interest {03}

Working paper at SSRN

Standard economic models are based on axioms that epitomize the fundamental behavioral assumptions. This approach is trapped in a blind alley. The suggested change of perspective is guided by the question: what is the minimum set of nonbehavioral propositions for the consistent reconstruction of the evolving monetary economy? We start with three structural axioms and determine their real-world implications. The differentiation of the axiom set leads to the structural value theorem. For the limiting case of the harmonic structure a formal link to the classical and neoclassical value theories can be established. 

May 15, 2011

Keynes’s missing axioms {02}

Working paper at SSRN

Abstract  Between Keynes’s verbalized theory and its formal basis persist a lacuna. The conceptual groundwork is too small and not general. The quest for a comprehensive formal basis is guided by the question: what is the minimum set of foundational propositions for a consistent reconstruction of the monetary economy? We start with three structural axioms. The claim of generality entails that it should be possible to prove that Keynes’s formalism is a subset of the structural axiom set. The axioms are applied to a central part of the General Theory in order to achieve consistency and generality.

March 21, 2011

Scrap the Lot and Start Again {01}

In the wake of the recent financial crisis, heterodox economists have taken up a time-honored refrain and proposed to abandon the axiomatic method. The present paper argues that this proposal is self-defeating.