September 8, 2017

Why economists don’t know what profit is

Comment on Steve Roth on ‘Why Economists Don’t Know How to Think about Wealth (or Profits)’

Blog-Reference and Blog-Reference

The short answer is because economists are scientifically incompetent. The profit theory is false since Adam Smith or, as the Palgrave Dictionary puts it, “A satisfactory theory of profits is still elusive.” (Desai, 2008)#1, #2 In fact, Walrasians, Keynesians, Marxians, Austrians, and Pluralists have NO idea of profit ― the foundational concept of their subject matter.

Both Orthodoxy and Heterodoxy lack material/formal consistency. From the viewpoint of science, economics is a failure, from the viewpoint of the general public, economics is a fraud.

In order to establish material consistency, one needs measurement and one of the most important measurement tools of economics is National Accounting. The importance of National Accounting for testing of economic models is comparable to CERN for testing in physics. MMTers got the point in principle (albeit not in practice#3), yet in general, it holds that economists neither understand the significance nor the elementary mathematics of National Accounting.

Economic theory and accounting are like hand and glove. Therefore, it is of utmost importance that the foundational concepts are consistently defined and the SAME in theory and accounting. It is the worst mistake to play accounting against theory/model. At a deeper level, they have a common conceptual/formal core, i.e. the axioms of economics.

Because the nominal magnitudes of accounting are a subset of a comprehensive theory which is composed of nominal and real variables, the concepts have to be consistently defined in theory and then applied one-to-one in National Accounting.#4 Theory has to take the lead.#5

It holds: “The only way to arrive at coherent languages is to set up axiomatic systems implicitly defining the basic concepts.” (Schmiechen) The fact is that Walrasian microfoundations and Keynesian/MMT macrofoundations are axiomatically false. This is why economics is a failed science.

Steve Roth names two big discrepancies between theory and National Accounting, i.e. ‘The Paradox of Monetary Profits’#6 and ‘Saving and Investment’.#7 These discrepancies can only be resolved by a Paradigm Shift, that is, by a move from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations.#8

Steve Roth concludes: “To quote David Glasner, ‘as much as macroeconomics may require microfoundations, microeconomics requires macrofoundations.’ … Those foundations are the technical economic terms used — because words are what we use to think together — and the mutually coherent and interrelated accounting identities that define those terms. Absent those definitions, economists quite literally don’t know what they’re talking about.” In brief: If it isn’t macro-axiomatized, it isn’t economics.#9

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith
#2 How the Intelligent Non-Economist Can Refute Every Economist Hands Down
#3 Rectification of MMT macro accounting
#4 True macrofoundations: the reset of economics
#5 A tale of three accountants
#6 For more details of the big picture see cross-references Profit.
#7 For details of the big picture see cross-references Refutation I=S.
#8 Keynesians ― terminally stupid or worse?
#9 For details of the big picture see cross-references Paradigm Shift.

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