January 4, 2017

The economic machine is broken? Don’t call the heterodox repairman!

Comment on David Ruccio on ‘The machine is broken’


David Ruccio summarizes: “The capitalist machine is broken — and no one seems to know how to fix it. The machine I’m referring to is the one whereby the ‘capitalist’ ... converts the ‘surplus’ (i.e., corporate profits) into additional ‘capital’ ... — thereby preserving the pact with the devil: the capitalists are the ones who get and decide on the distribution of the surplus, and then they’re supposed to use the surplus for investment, thereby creating economic growth and well-paying jobs.”

David Ruccio paraphrases the age-old narrative of how the market mechanism works and argues that it is wrong. This is true, of course, but not exactly what one wants to hear from an economist — except as a brief introduction to the scientifically true economic theory. The fact of the matter is, though, that traditional Heterodoxy has failed to provide a consistent description of how the monetary economy works, just as Orthodoxy.

After more than 200 years, economists are still groping in the dark with regard to the two most important features of the economy: the profit mechanism and the price mechanism.

It is not a secret that economists have NO idea of the fundamental concepts of their subject matter, that is, of profit and income. This has always been in plain sight in the Palgrave Dictionary: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

This applies also to David Ruccio. He gets the relationship between profit, investment, and distributed profit wrong. To cut a longer analysis short, the correct profit equation for the investment economy is here simply reproduced: Qm≡Yd+I−Sm. Legend Qm monetary profit, Yd distributed profit, Sm monetary saving, I investment expenditures. The profit equation gets a bit longer when government and foreign trade are included.

Ruccio’s observation that ‘no one seems to know how to fix the economy’ applies to Orthodoxy AND traditional Heterodoxy. By endlessly repeating the mantra ‘the capitalist machine is broken’ traditional Heterodoxy distracts from the provable fact that it has never provided a consistent theory of how capitalism in general and the profit mechanism in particular works.#1

Egmont Kakarot-Handtke

#1 For details of the big picture see cross-references Profit and cross-references Heterodoxy and Heterodoxy, too, is proto-scientific garbage.