April 4, 2017

The fundamental problem of economics: scientific incompetence aka stupidity

Comment on Dirk Ehnts on ‘Structuralist Macroeconomics’

Blog-Reference and Blog-Reference

The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter, i.e. profit, wrong. So, what we actually have is the pluralism of false theories.

The one thing that is common to all these failed approaches is that they do not get the fundamental economic concepts of profit and income right. This is like medieval physics before the concepts of force, mass, energy, etcetera were properly defined and understood.#1

Here is the point where economists go collectively over the cliff: “MACROECONOMICS begins with the notion that the value of saving generated by all participants in the economy must by one means or another come into equality with the value of investment in the short run.” (Lance Taylor, see intro)

The IS equality/equilibrium is false since the classics but Dirk Ehnts, too, does not get it: “I know from many conversations I had with students that the investment-savings inequality is very difficult to grasp and had my own problems in the context of planned investment / planned saving, but by now I am very certain.”

The fact of the matter is that the representative economist does not understand the pivotal concept of his subject matter and the elementary mathematics of accounting.

For the determination of monetary profit of the economy as a whole one has to start with the most elementary case of a pure consumption economy without investment, government, and foreign trade.#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.
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, loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law, which quite obviously satisfies the zero-sum requirement Qm+Sm=0 of macroeconomic accounting.

When distributed profits Yd and investment I are added the correct profit equation reads Qm≡Yd+I−Sm. Deficit spending of the household sector and profit distribution of the business sector are the determinants of total monetary profit in the market economy (ex government and foreign trade). Saving is NEVER equal to investment, neither ex-ante nor ex-post nor otherwise.#3

Failed economics has to fully replace false Walrasian microfoundations and false Keynesian macrofoundations by the true macrofoundations.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith
#2 The macrofoundations approach starts with three systemic (= behavior-free) axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (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 For details of the big picture see cross-references Refutation of I=S