May 29, 2013

Profit is the key

Comment on Lars Syll on 'The great IS-LM obfuscation'


It is laudable to direct students away from irrelevant economic models.

Orthodox economics is irrelevant from Jevons to DSGE. The problem is that Heterodoxy from Veblen to Minsky is only slightly better. With a critical stance, it is easy to identify and avoid the worst blunders of standard theory. Davidson is a case in point. Of course, the ergodic hypothesis is inapplicable in economics. Keynes was right word for word in what he said about uncertainty (1937, p. 214). The point is that this was only revolutionary vis-à-vis the 'classical' economists. Outside this intellectually closed sphere, the argument is trivial. The next taxi driver can tell you that ‘the price of copper and the rate of interest twenty years hence’ is uncertain. If this is scientific progress it is not terribly impressive. It is a sad fact that heterodox economists have a strong bias to draw the wrong conclusions from correct observations. This brings us to Minsky.

Minsky (2008, p. 160) states correctly “What determines profits? is a key question for understanding how our economy works.” Clearly, it is irresponsible to give economic advice without a proper understanding of profit. With his zero-profit economy, Walras demonstrated a complete lack of understanding. Therefore, he and the neo-Walrasians are out. However, the General Theory is also based on a false profit theory (Tómasson and Bezemer, 2010), which has not been rectified by the Post Keynesians (Kakarot-Handtke, 2013), (Desai, 2008, p. 10). Therefore, Keynesian models, including bastardizations like IS-LM are out, too.

What about Minsky in particular? He tells us: “The simple equation 'profit equals investment' is the fundamental relation for macroeconomics that aims to determine the behavior through time of a capitalist economy with a sophisticated, complex financial structure.” (2008, p. 161)

Unfortunately, this simple equation covers only a limiting case. This is not much in absolute terms but considerably more than what IS-LM, which is a zero-profit model, ever had to offer. Minsky, too, got macroeconomic profit wrong. The axiomatically correct formula for the elementary case reads Qm≡I−Sm Legend: Qm business sector's monetary profit, I investment expenditures, Sm household sector's monetary saving. Minsky implies Sm=0, IS-LM implies Qm=0. Macroeconomics is proto-scientific garbage since Keynes.

It is a mission impossible these days to direct students to relevant economic models because there are none.

Egmont Kakarot-Handtke

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
Kakarot-Handtke, E. (2013). Why Post Keynesianism is Not Yet a Science. Economic Analysis and Policy, 43(1): 97–106. URL
Keynes, J. M. (1937). The General Theory of Employment. Quarterly Journal of Economics, 51(2): 209–223. URL
Minsky, H. P. (2008). Stabilizing an Unstable Economy. New York, Chicago,  San Francisco: McGraw Hill, 2nd edition.
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 'Heterodoxy, too, is still in the wood'

For more on Minsky see AXECquery.


Wikimedia AXEC143d Macroeconomic profit with increasing complexity

May 11, 2013

How to get rid of supply-demand-equilibrium {42}

Working paper at SSRN

Abstract  This paper provides a substantial reconceptualization of the serial clearing of the product market on the basis of structural axioms. The change of premises is required simply because from the accustomed premises only the accustomed conclusions can be derived and these are known to be inapplicable in the real world. This holds in particular for the still-popular idea that the working of a market can be described in terms of the triad supply-function—demand-function—equilibrium. Structural axiomatization provides the complete and consistent picture of interrelated product market events.

May 1, 2013

Toolism! A critique of EconoPhysics {41}

Working paper at SSRN

Abstract  Economists are fond of the physicists' powerful tools. As a popular mindset, Toolism is as old as economics but the transplants failed to produce the same successes as in their aboriginal environment. Economists, therefore, looked more and more to the math department for inspiration. Now the tide turns again. The ongoing crisis discredits standard economics and offers the chance for a comeback. Modern EconoPhysics commands the most powerful tools and argues that there are many occasions for their application. The present paper argues that it is not a change of tools that is most urgently needed but a Paradigm Shift.