Comment on David Ruccio on ‘Don’t worry?!’
David Ruccio maintains “Sure, new forms of automation might lead to higher productivity and much else that Tyson and Lund find so alluring. But who’s going to benefit? If we go by the last few decades, large corporations and wealthy individuals are the ones who are going to capture most of the gains from the new technologies.” and “When it comes to separating fact from fiction, aside from the embarrassing epistemological positions liberals rely on, where are the statistics that might help us make sense of what is going on out there ― numbers like the Reserve Army of Unemployed, Underemployed, and Low-wage Workers or the rate of exploitation.”
This blather proves that heterodox economists, too, have no idea how the economy works.#1
In order to fully appreciate the proto-scientific state of both orthodox and heterodox economics, one needs the axiomatically correct theory. Because economics is a failed science it has to be reconstructed from scratch.
As the new analytical starting point, 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 in each period, the price is given by 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. For the graphical representation see Figure 1.#2
The price is determined by the wage rate, which takes the role of the nominal numéraire, and productivity.
From (1) follows W/P=R, i.e. the real wage is equal to the productivity. So, for a start, labor gets 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 (deficit = loss) equals the household sector’s deficit = dissaving (surplus = saving). This is the most elementary form of the macroeconomic Profit Law. Under the condition of budget-balancing total monetary profit is zero.
In order that profit comes into the world, consumption expenditures C must be greater than wage income Yw, that is, the household sector must run a deficit. This means, first of all, that profit for the economy as a whole has NOTHING to do with productivity. From the fact, that an individual firm can increase profit by increasing productivity does NOT follow that this is true for the economy as a whole. What we have here is the built-in blunder of microfounded economics, i.e. the Fallacy of Composition.
The axiomatically correct Profit Law is given for the GENERAL case as Qm≡Yd+(I−Sm)+(G−T)+(X−M). Legend: Qm total monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving, G government expenditures, T taxes, X exports, M imports. Neither Walrasians, nor Keynesians, nor Marxians, nor Austrians got profit right until this very day.#3 This is why economics is a failed science and why economists have always been such a threat to their fellow citizens.
Now, we let robots in the pure production-consumption economy. The immediate effect of improved organization/machinery/robots is an increase in productivity.
From (1) follows that if productivity increases over time the market-clearing price falls. So, in order to avoid deflation, the wage rate has to rise at the same rate as productivity. Output O increases according to axiom (A2) O=RL. The real situation of the household sector, measured in output, improves continuously with increasing productivity R and employment L. Let L here denote full employment. The workers get the whole product O and profit Qm is zero because the budget is balanced C=Yw. The bottom line for the elementary production-consumption economy is that robots need not pose any problems with regard to underemployment or exploitation.
The problems come from another direction. Increasing output O (i) requires more raw materials/energy, and (ii), may run against the point of satiation/bliss point. So, there are limits to growth.
At the bliss point O* the economy switches from ascent to gliding, that is, the implicit causality of O=RL has to be changed to L=O*/R, that is, total labor time L is reduced with increasing productivity. In other words, the productivity increase translates at the bliss point O* into an increase of leisure.
The challenge is, how to reduce total labor input L without creating unemployment for a part of the labor force. The sustainable economy behind the bliss point works as follows: with productivity R up, L goes down and L per worker goes down proportionally, the wage rate goes up with the rate of productivity increase, the price remains constant, the real wage is always equal to the increased productivity, the budget is balanced C=Yw, the market is cleared X=O, leisure increases across the board, L goes asymptotically to zero.
In the end, it holds “… in the long run leisure is an economic summum bonum.” (Georgescu-Roegen) The growth of material consumption is only an interim phase.
#1 Heterodoxy and Pluralism, too, are proto-scientific garbage
#2 Wikimedia AXEC31 Elementary production-consumption economy
#3 Proﬁt for Marxists
This blog connects to the AXEC Project which applies a superior method of economic analysis. The following comments have been posted on selected blogs as catalysts for the ongoing Paradigm Shift. The comments are brought together here for information. The full debates are directly accessible via the Blog-References. Scrap the lot and start again―that is what a Paradigm Shift is all about. Time to make economics a science.