December 12, 2016

Macroeconomics for dummies (I)

Comment on Peter Cooper on ‘Short & Simple ― Total Spending Equals Total Income’


The heteconomist Peter Cooper says: “Since every act of spending results in income for somebody else, total spending for the economy as a whole equals total income. This is true by definition and is a basic building block in macroeconomics.” (See intro)

Both, orthodox and heterodox economists subscribe to this statement as the self-evident rock-bottom truth of all of economics. Too bad that this statement is materially/logically false.

The foundational error/mistake/blunder consists of the methodological fact that the two most important magnitudes of economics — profit and income — are ill-defined.#1 In order to see this one has to go back to the most elementary configuration, that is, the pure production-consumption economy which consists only of the household and the business sector.#2

In this elementary economy, three configurations are logically possible: (i) consumption expenditures are equal to wage income C=Yw, (ii) C is less than Yw (iii) C is greater than Yw.

• In case (i) the monetary saving of the household sector Sm≡Yw−C is zero and the monetary profit of the business sector Qm≡C−Yw, too, is zero. The product market is cleared, i.e. X=O, in all three cases.
• In case (ii) monetary saving Sm is positive and the business sector makes a loss, i.e. Qm is negative.
• In case (iii) monetary saving Sm is negative, i.e. the household sector dissaves, and the business sector makes a profit, i.e. Qm is positive.

It always holds Qm≡−Sm, in other words, at the heart of the monetary circuit is an identity: the business sector’s deficit equals the household sector’s surplus and the business sector’s surplus equals the household sector’s deficit. Put bluntly, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It follows directly from the profit definition Qm≡C−Yw and the definition of household sector saving Sm≡Yw−C. The causality runs from saving/dissaving of the household sector to loss/profit of the business sector.

Loss or profit is NOT income. Only distributed profit is income. The profit theory is false since Adam Smith.#3

Egmont Kakarot-Handtke

#1 How the Intelligent Non-Economist Can Refute Every Economist Hands Down and Keynes’s Missing Axioms Sec. 14-18
#2 The elementary production-consumption economy is given by three systemic axioms: (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.
#3 Essentials of Constructive Heterodoxy: Profit and cross-references Profit

Related 'The problem with macro in two words' and 'Macro for dummies (II)' and 'Macroeconomics ― dead since Keynes' and 'The canonical macroeconomic model'.


Wikimedia AXEC121e and in newer notation AXEC121g, C and EC are interchangeable

REPLY to Schofield on Dec 13

Obviously, you cannot read. The point at issue is ‘Total Spending Equals Total Income’ and NOT the tautology ‘Total Contracting = Total Contracting.

Money is a related issue but an analytically different matter. See Essentials of Constructive Heterodoxy: Money, Credit, Interest.


NOTE of peterc on 14 December 2016 at 3:11 AM:

“Hi Egmont. I’d prefer you didn’t clog up the blog with essentially the same comments you have posted at many other sites along with the numerous links to your blog and dozens of SSRN papers, most of which are basically just the same paper repeated with a different title and cosmetic alterations. (Yes, I have had a look over them in the past.)

If you do insist on posting comments here, kindly refrain from attacking other commenters (“Obviously, you cannot read”) or insulting readers (“Macro for dummies”) and state your point in a polite manner.

Unlike your contributions, the comments of Schofield and numerous others have added — and continue to add — a great deal of value to the blog. I consider your contributions basically to be graffiti, especially when they appear in response to introductory posts. They create noise, at best, and confusion at worst for newcomers to economics.

Please consider going away and not coming back unless and until you are prepared to engage in discussion in a constructive fashion.

For now, I am keeping your comments on moderation. I will exercise my right not to publish them, when I see fit, without explanation or apology.