Blog-Reference and Blog-Reference-Link and Blog-Reference on Jan 10
Sraffa realized that there is something fundamentally wrong with neoclassical marginalism. Up to this point, he was right, of course. But, like all other heterodox economists, he failed to produce a valid replacement. Because Sraffa, too, produced merely proto-scientific garbage it is misleading to characterize his approach as a “revolution in economic theory”. Economic theory is false since Adam Smith, and Sraffa is part of the overall scientific failure.
The lethal blunder of economics is the theory of profits. As the Palgrave Dictionary puts it: “A satisfactory theory of profits is still elusive.” (Desai, 2008). Economists have NO idea of the pivotal concept of their subject matter and because of this, ALL orthodox and heterodox approaches are fundamentally flawed.#1
Sraffa starts with an “extremely simple society” which produces wheat and iron#2, p.3. In other words, he starts with a real model just like Ricardo#3, and this is the fundamental methodological error/mistake/blunder. Real models cannot capture profit and this fact is obscured by Sraffa’s false assertion that surplus (a real magnitude) is the same as profit#2, p.6.
Methodologically, Keynes was a bit more sophisticated than Sraffa because he clearly recognized that economic theory has to start with the “monetary theory of production”. The economy constitutes itself through the interaction of real AND nominal variables. From this follows that ALL real models are a priori false.
Sraffa defines the rate of profit without a prior definition of profit#2, p.6. To clearly see the conceptual blunder, Sraffa’s elementary real economy has to be replaced by the elementary production-consumption economy.
In the elementary production-consumption economy,#4 three configurations are logically possible: (i) consumption expenditures are equal to wage income, (ii) consumption expenditures are less than wage income, (iii) consumption expenditures are greater than wage income.
In case (i) wage income is assumed to be Yw=100 monetary units (e.g. trillion dollar/euro/yuan) and consumption expenditures are assumed to be C=100 monetary units. Then, 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.
In case (ii) wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=90 monetary units. Now, monetary saving is Sm=10, and the business sector makes a loss Qm=−10. The whole output is sold, i.e. O=X, and the market-clearing price P is now lower than in case (i).
In case (iii) wage income is assumed to be Yw=100 monetary units and consumption expenditures are assumed to be C=110 monetary units. Now, monetary saving is Sm=−10=dissaving, and the business sector makes a profit Qm=10. The whole output is sold, i.e. O=X, and the market-clearing price P is now higher than in case (i).
It always holds Qm≡−Sm, in other words, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law for the economy as a WHOLE.
It holds in particular
- Overall profit does neither depend upon the agents’ personal qualities, motives, their ideas about what profit is, nor on profit-maximizing behavior. These subjective factors are IRRELEVANT. Profit for the economy as a whole is OBJECTIVELY determined.
- Profit/loss of the business sector is, in the simplest case, determined by the increase/ decrease of the household sector’s debt.
- Wage income is the factor remuneration of labor input. Profit is NOT a factor income.
- There is no relation at all between profit, capital, marginal or average productivity.
- Profit has NO real counterpart in the form of a piece of the output cake. Profit has a monetary counterpart. As a logical consequence, profit cannot appear in a real model.
Sraffa’s definition of the profit rate is utter methodological dilettantism. As a consequence, his entire analytical superstructure falls apart. The proper place of Sraffa’s book has always been the wastebasket. It is a pointless exercise to recycle it as an alternative to the neoclassical approach. To fully replace Neoclassics requires the shift from false microfoundations to true macrofoundations. This, obviously, is absolutely beyond the horizon of incompetent scientists like Sinha.
#1 The Profit Theory is False Since Adam Smith
#2 Sraffa, Production of Commodities by Means of Commodities
#3 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#4 The correct macrofoundations are given for a start with three systemic 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.
Related 'Putting the production function back on its feet' and 'The solemn burial of marginalism' and 'The CCC ― a monument of economists’ utter scientific incompetence'.
Heterodoxy is as dead as Orthodoxy. For details see The futile attempt to recycle Sraffa.