October 20, 2017

Economists understand neither Capitalism nor Socialism

Comment on Michael Hudson on ‘Socialism, Land and Banking: 2017 Compared to 1917’

Blog-Reference and Blog-Reference

Michael Hudson tells economic history from early Western Capitalism to Russian Socialism to modern China. This account suffers from the fact that he does not know what profit is. In his ignorance, he is not alone. The profit theory is false since Adam Smith. The major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the foundational economic concept of profit wrong.

Smith treated profit as the income of the factor capital. This was the original blunder.#1 It was followed by Ricardo’s theory of rent#2, and Marx’s theory of profit#3, and Keynes’ messed-up macro.#4 As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008)

Because Michael Hudson does not understand profit he does not understand how the monetary economy works. The fact is that profit for the economy as a whole does not at all depend on who owns the means of production. In other words, the Profit Law holds always and everywhere: in capitalist America, in former communist Russia, and in the mixed economy of China. Michael Hudson’s historical account remains on the surface of political economics. Political economics has produced nothing of scientific value in the last 200+ years.

For the proof, macroeconomic profit is here determined for the most elementary case. The pure production-consumption economy is defined with this set of macroeconomic 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.

Under the conditions of market-clearing X=O and budget-balancing C=Yw the price is given by P=C/X or P=W/R (1), i.e. the market-clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.#5

From (1) follows that the real wage is equal to productivity, i.e. W/P=R (2). The wage income receivers get the whole product.

Monetary profit for the economy as a whole is defined as Qm≡C−Yw and monetary saving as Sm≡Yw−C. It always holds Qm≡−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and vice versa,  the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget balancing, the total monetary profit is zero. The Profit Law holds for every monetary economy, no matter how it characterizes itself politically.

Overall profit depends alone on deficit spending, that is, the change of private or public debt. It does NOT depend on labor time, or productivity, or monopoly power, or greedy landlords, or rent-seeking bankers. These factors are only relevant to the distribution of overall profit between the firms. Traditional profit theory has been nothing more than a Fallacy of Composition, that is, an illegitimate generalization of what can be observed on the microeconomic level. Economists are failed/fake scientists and Michael Hudson is no exception.

Egmont Kakarot-Handtke

#1 The Profit Theory is False Since Adam Smith
#2 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#3 Profit for Marxists
#4 How Keynes got macro wrong and Allais got it right
#5 For the graphical representation see Wikimedia AXEC31