February 16, 2018

Ricardo and the invention of class war

Comment on Sandwichman on ‘No Other Way of Keeping Profits Up’

Blog-Reference and Blog-Reference on Feb 17

Ricardo asserted the seemingly obvious “There is no other way of keeping profits up, but by keeping wages down.” This assertion is pure common sense, plain and immediately convincing as “the sun goes up”. Needless to emphasize that both assertions are scientifically false.#1

By asserting an antagonism between wages and profits, Ricardo provided the economic underpinning for Marx’s sociological/political concept of class struggle or class war. In the following the proof is given that there is NO antagonism between wages and profits and that classes are an optical illusion.

The elementary production-consumption economy is defined with this set of macro 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.#2

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. It translates into W/P=R (2), i.e. the real wage is equal to productivity. For the graphical representation see Wikimedia.#3

Monetary profit 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 deficit (surplus) equals the household sector’s surplus (deficit). Loss is the counterpart of saving and profit is the counterpart of dissaving. This is the most elementary form of the macroeconomic Profit Law. It says that profit/loss has NOTHING to do with labor time, wages, productivity, greed, monopoly, power etcetera but with the change of private and public debt.

In the elementary production-consumption economy, labor gets the whole product according to (2), and profit for the business sector as a whole is zero because of C=Yw. All changes in the system are reflected by the market-clearing price. As a matter of principle, the elementary production-consumption economy can go on indefinitely at any level of employment L. The living standard of the workers is defined alone by productivity.

Obviously, there is NO such thing as antagonism of wages and profits in the elementary production-consumption economy. If the wage rate W goes up the market-clearing price goes up according to (1) and the real wage remains unchanged according to (2).

This means, first of all, that Ricardo’s theory of profit and rent is proto-scientific garbage. This is fatal for Marx who built on Ricardo.

The business sector is now split into two identical firms and firm 1 is supposed to cut the wage rate W1 arbitrarily by half. From this follows that the market-clearing price P declines if all other variables are unchanged. Firm 2 is affected because total income Yw falls and with it consumption expenditures C and the market-clearing price P.

The reduction of the wage rate W1 increases the profit of firm 1 and produces a loss in firm 2. When we look alone at firm 1 we see what Smith, Mill, Ricardo, and Marx have seen before, to wit, wages down ― profit up. This fits the time-honored stereotype of wages and profits as antagonists.

The error/mistake/blunder of Ricardo et al. was to generalize what is true for a single firm and this is known as Fallacy of Composition.

If profit has been zero in the initial period because of budget-balancing C=Yw then firm 2 makes a loss which is exactly equal to firm 1’s profit. Hence, the arbitrary wage rate cut of firm 1 does NOT increase the profit of the business sector as a whole but only REDISTRIBUTES profit/loss between the firms that constitute the business sector.

Seen from the perspective of a single firm, the antagonism of wages and profits is absolutely real. This, though, is parochial realism. The complete picture reveals that firm 1 is better off to the disadvantage of firm 2 and the workers of firm 2 are better off to the disadvantage of the workers of firm 1 because at a lower market clearing price they absorb a bigger share of output O with their unaltered income. The situation of the business sector as a whole is unchanged and the same is true for the household sector as a whole. If there is exploitation it happens within the sectors. A partial wage rate change leads only to a redistribution of profits between the firms and of output between the workers. A global wage rate change leads under the condition of budget balancing and market clearing only to a price hike.

For the economy as a whole, the Ricardian antagonism of wages and profits is an optical illusion. This has a bearing on the political notion of classes. Because Ricardo’s profit theory is false Marx’s theory of class war is false. What looks like exploitation is, in fact, cross-over exploitation WITHIN the Marxian classes.

The myopic agents, workers and capitalists alike, are blind to these interdependencies and therefore prone to the Fallacy of Composition. This is excusable. But that economists suffer from the same delusions is inexcusable.

As One of the Old School put it in 1829 “That which bears the name of Political Economy, is now taught at your University, …, as a science equally true in its principles with Geometry. If it be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”#5

Egmont Kakarot-Handtke

#1 Ricardo, too, got profit theory wrong
#2 For details see Profit for Marxists
#3 Wikimedia AXEC31 Elementary Production-Consumption Economy

#4 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism
#5 The real problem with the economics Nobel

Related 'Profit and stupidity' and 'The abject failure of orthodox and heterodox distribution theory' and 'No exploitation, no classes' and 'Marx, the moron' and 'Your profit theory is false' and 'If we only had classes'. For details of the big picture see cross-references Profit.

REPLY to Sandwichman on Feb 16

You say “Well, Egmont, you forget that if the owners of capital BELIEVE that profits are a subtraction from wages (and/or vice versa) and act accordingly it becomes a self-fulfilling prophecy.”

Obviously, you have never heard of the Invisible Hand. It does not matter what people believe they are doing. They think they follow their own interest but, in fact, promote the overall optimum optimorum. Self-delusion is the whole point of the free market system and the ultimate justification since Mandeville’s Private Vices = Public Benefits. Of course, this is economic storytelling and proto-scientific garbage.

Overall net-profits do NOT come into existence because people dream or hallucinate about them but ultimately because of the increase of private/public debt. This is the Invisible Hand. If the budget is balanced C=Yw there is NO overall profit, NO matter what capitalists believe or how they act. With regard to profit, there is NO self-fulfilling prophecy only the Iron-Objective-Eternal-Testable Profit Law.

My proof shows how the Invisible Hand works. What people believe is NOT AT ALL a matter of economics but of psychology and sociology.

Take notice that economics is NOT a science of Human Nature/motives/beliefs/ expectations/behavior/action but a systems science. Economics has since 200+ years been on the wrong track and has produced nothing but folk psychology and folk sociology. Economics is a failed science because economists are incompetent scientists who suffer from the social science delusion.#1

The Profit Law consists of measurable variables. It is testable and it will be corroborated without exception in all countries with a scientific infrastructure without bothering one second about people’s silly beliefs.

#1 For details of the big picture see cross-references Failed/Fake Scientists

REPLY Sandwichman on Feb 16

You say “The ‘invisible hand’ is a lump of labor”

Obviously, you have not realized that your lump-of-labor (EXPLETIVE DELETED) has already been refuted. See Unemployment is the outcome of political economics.

REPLY to Barkley Rosser on Feb 17

Scientific standards are well-defined: “Research is, in fact, a continuous discussion of the consistency of theories: formal consistency insofar as the discussion relates to the logical cohesion of what is asserted in joint theories; material consistency insofar as the agreement of observations with theories is concerned.” (Klant)

Because a theory must satisfy TWO criteria ― material AND formal consistency ― it is sufficient for a refutation to prove that it is EITHER materially OR formally inconsistent.

I have proven that Ricardo’s profit/distribution theory is formally inconsistent. More specifically, that Ricardo committed the Fallacy of Composition and the Humpty Dumpty Fallacy by defining total income as the sum of wage income and profit.#1, #2 More specifically, the macroeconomic definition of total income as Y=W+P translates algebraically into 1=1/(1+P/W)+1/(1+W/P) and this translates verbally into Ricardo’s pivotal claim “… profits would be high or low in proportion as wages were low or high.” (Principles, p. 110) but because the premise is false Ricardo’s assertion is false.

By consequence, Ricardian economics is refuted. Now, the ball is in your field. If you do not agree with me ― and you obviously don’t ― you have to demonstrate where my logical error/mistake/blunder lies. Blah blah is NOT sufficient.

What you could alternatively do is to demonstrate that I am empirically wrong because from the axiomatically correct profit theory follows the sectoral balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 while from Ricardo’s false profit theory follows the Post Keynesian balances equation (I−S)+(G−T)+(X−M)=0.

The experimentum crucis ― which of the two equations is empirically true? ― has never been performed for the simple reason that macroeconomics runs since Keynes blindly on the false profit theory and the false Post-Keynesian balances equation.#3 MMT is the Smoking Gun proof.

But again, the ball is in your field. If you know in your profound academic erudition that there is an empirical study that has corroborated the Post Keynesian balances equation or refuted my balances equation it is your scientific duty to present it in the current discussion. Again, blah blah is NOT sufficient.

As One of the Old School said in 1829: “If it [economics] be not a science, but a mass of fictions, you are, by teaching it, deeply disgracing your University, and destroying your own reputation as men of science.”

#1 Ricardo, too, got profit theory wrong
#2 Profit, income, and the Humpty Dumpty Fallacy *
#3 How Keynes got macro wrong and Allais got it right


REPLY to vertegaa@vcn.bc.ca on Feb 18

A theory must satisfy TWO criteria ― material AND formal consistency. Logical consistency is secured by applying the axiomatic-deductive method and empirical consistency is secured by applying state-of-the-art testing. This is known for 2300+ years: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” (Aristotle)

So, the first problem to solve is the Starting Problem. J. S. Mill put it thus: “What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.”

Krugman, for one, is quite explicit about how he has solved the Starting Problem: “most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Krugman, of course, is an idiot. Maximization and equilibrium cannot serve as axioms because they are NOT certain, true, and primary. For various methodological reasons, given elsewhere#1, I propose to start with this core of macroeconomic and behavior-free axioms: (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. *

These premises are certain, true, and primary, and therefore satisfy all methodological requirements. All variables are measurable in principle. The set of premises is minimalistic, that is, Occam’s Razor has been applied and the set cannot be reduced further, only expanded. The set contains no nonentities like utility, constrained maximization, equilibrium, and no normative assertions.

You can NOT refute these axioms by doubting and nagging, only by replacing them with a superior set. Or, in Feynman’s words: “The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy.” (Feynman)

I am sure that you cannot do it, and nobody else, for that matter because you cannot have an axiom set for the most elementary production-consumption economy with less than three axioms. The set (A1)/(A3) replaces the neo-Walrasian set and the Keynesian set of foundational propositions.

You say: “because the ‘axioms’ you come up with are inherently insufficient to glean a systematic meaning, or purpose, from.” Yes, but the idea that some purpose must be put into the axioms indicates that you do not yet fully understand what axiomatization is all about.

You say: “You ‘axiomatically’ split total profit Q into Qm (monetary profit) and Qn (non-monetary profit). If the system allows the latter to become part of the former and/or vice-versa, however, then not only are these not ‘entirely different kinds of profits’ as you claim but you’ll have to show a common numeraire as well, or the premise and hence your theory of profit is false, …”

Perhaps the terminology is a bit unfamiliar. Both monetary Qm and nonmonetary profit Qn are nominal magnitudes, e.g. Dollar, Yen, Euro, etc., but monetary profit can be read off a bank account or touched in the cash box, non-monetary profit is the not-yet-realized increase of an asset’s value or what is commonly called a paper profit.#2

You say “Come to think of it, what is your theory of money? Every factor/element in your identities numerated in the latter needs it!”

True, accordingly, money has already been treated extensively elsewhere.#3

You say “what makes you now think that such a static depiction has merit in a known to be dynamically operating economy.”

The ‘general balances equation’ is not static and has nothing to do with equilibrium. It is more like reading a speedometer in a moving car.#4

#1 For details of the big picture see cross-references Axiomatization



REPLY to Sandwichman on Feb 19

You ask: “What is your motivation for expending what must be considerable time, effort and frustration in promulgating your ‘science’?”

Moot question as you could know from Schumpeter: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

More clues for the clueless are to be found in A heap of scientific rubbish.

Yous ask: “Do you ever experience self-doubt or are you 100% certain that your discovery is 100% foolproof?”

No, yes. More clues for the clueless are to be found in John Hicks, fake scientist.

REPLY to vertegaa@vcn.bc.ca on Feb 19

Roughly speaking, the distinction between science and non-science corresponds to the ancient Greek’s distinction between episteme (= knowledge) and doxa (= opinion). Aristotle relates to episteme while the Sophists relate to doxa: “Sophistry is a productive art, human, of the imitation kind, copy-making, of the appearance-making kind, uninformed and insincere in the form of contrary-speech-producing art.” (Wikipedia) Economics has never risen above sophistry.

You say: “All your axioms involve accounts; “ False. The 2nd axiom, i.e. O=RL, involves NO accounts. Only the subset of nominal variables Yw, C reappears in macro accounting. The axioms involve elementary algebra, and accounting is only part of the story.

Thank you for the link to your preface. I have read your three axioms and, as you let me know “I don’t think you are capable of teaching me much”, you dispense me from the obligation to comment on them.

Here some minor points for general clarification.

You say: “You’re not saying much about objectivity, i.e. your quasi-subjective approach,” I have clearly stated that economics is not a social science but a systems science. Accordingly, it has to be based on objective axioms. My approach is objective-structural-systemic and this is exactly what makes it superior.

You say: “Or do you perhaps also hold that the economy is meaninglessly meandering through time?” Meaning is a religious/philosophical/psychological category that is NOT axiomatizable, to begin with. You are still lost in the social science delusion.

You mention Koopmans’ monetary theory and ask: “The dissertation was written in German, did you investigate it in your quest to destroy conventional economics?”

No. Koopmans was one of the founding fathers of General Equilibrium Theory. If he had a superior theory of money it did not reappear in GT, see Hahn: ‘On some problems of proving the existence of an equilibrium in a monetary economy.’ Anyway, Koopmans has not realized in time that Walrasian equilibrium is a dead end and therefore he failed the scientific competence test.

“At long last, it can be said that the history of general theory from Walras to Arrow-Debreu has been a journey down a blind alley, and it is historians of economic thought who seem to have finally hammered down the nails in this coffin.” (Blaug, 1997)

The GT folks have put equilibrium in the axioms and this is a rather ordinary petitio principii.#1

By the way, I just stumbled across a quote of Hahn which makes my point: “It is pretty clear that usable economics will have to be of some sort of macro character. But what sort?” This dovetails with my meme: “If it isn’t macro-axiomatized it isn’t economics.”

With regard to the balances equation, I retract the metaphor with the speedometer. The balances equation (I−S)+(G−T)+(X−M)−(Qm−Yd)=0 relates to a period of a given length and shows the accounting balances = residuals of the four sectors (business, household, government, RoW). It has NOTHING to do with equilibrium. The beauty of the axiomatically correct balances equation is that it is testable against the After-Keynesian balances equation.

With regard to empirical testing, things do not end with the sectoral balances equation. From the objective systemic axioms follows the rather complex Employment Law which is ideally suited for a test against the Phillips curve.#2

I do not see that anything comparable follows from your axioms which resemble more a declaration of human rights.

REPLY to Barkley Rosser on Feb 20

The Humpty Dumpty Fallacy ― one of the worst idiocies of economics

In the elementary investment economy, macroeconomic profit Q is defined as the sum of profit in the consumer goods industry, i.e. Qc≡C−Ywc, and the investment goods industry, i.e. Qi≡I−Ywi, that is, Q≡(C−Ywc)+(I−Ywi) or Q≡C+I−Yw (i). Profit Q is greater than zero if the value of output C+I is greater than total wage income Yw.

Now, Humpty Dumpty introduces a redundant definition by saying that profit may be called “income of the business sector” and that this “income” can be added up with the wage income of the household sector to “total income” Ψ thus
(a) Ψ≡Q+Yw  and now (i) is rewritten
(b) Q+Yw ≡C+I and then, hey presto,
(c) Ψ≡C+I that is, “total income” is “by definition” identical to “value of output” or in the usual sloppy parlance “income = value of output” which obviously contradicts (i) and ― strangely enough ― makes profit disappear.

This definitional idiocy can be traced back to Keynes “Income = value of output = consumption + investment. Saving = income − consumption. Therefore saving = investment.” (GT p. 63) 

REPLY to vertegaa@vcn.bc.ca on Feb 20

The first sentence of your preface reads: “The methodology used in our quest to establish how the economy of ours functions, involves persuasion by logical reasoning that existing theories either got it all wrong, or are at least lacking in consistency to be able to explain how an economy in a human-central world works.”

Feynman said: “Perhaps it is because their horizons are limited in this way that some people are able to imagine that the centre of the universe is man.”

Persons with a limited horizon invariably end up in the so-called social sciences where they are doing cargo cult science. Cargo cult science comes in the format of the sitcom with much storytelling, second-guessing other people’s motives, plain common sense arguments of the type ‘the sun goes up’, moralizing, and appeal to emotions. People like explanations in the form X happened because A did Y to B because she is a good/bad person and good/bad persons are supposed to act in this way as we know since Adam and Eve. The emotionally charged narrative is the only form non-scientists can connect the dots and make sense of reality.

The scientists’ certain knowledge of reality is incorporated into a theory. A theory satisfies the criteria of material and formal consistency. The true theory is the humanly best mental representation of reality.

The truth value of a theory does not in any way depend on the understanding of non-scientists or whether they like/dislike it. Populism is non-existent in science.

Populism is the dominant form of communication in the political realm where the appearance of majority assent is needed because legitimacy is defined in this way.

In the preface you appeal directly to the populace: “The purpose of this book is to explain what an economy is and how it works; and it will set out to do so in a way that aspires to make it understandable for just about everyone moderately educated.”

This tells everyone that you are in the business of political agenda pushing and by implication entirely outside of science.

Your three axioms bear this out: “1. our economy is an all human-made systematic construct of accounts, having boundaries that are open to a natural existence into which we are born and live as aspiring to better ourselves beings, and whose price to do so all the economy's accounts are made-up from; 2. it exists for the sole purpose of adding an extensive variety of use-values to humanity, that couldn’t as commonly be obtained in the absence of a formal economic structure, whereby the exogenously existent living standards of human beings are to be enhanced in perpetuity; and 3. no one can be denied the opportunity to participate in it on the supply side. Short of criminal behaviour towards the stated second axiom, there are no exceptions to the third one; since there are no longer opportunities for human beings to make a living outside of an economy, it is a human right’s issue.”

This axiom set does not contain the words profit or income nor does it ever logically follow from it what profit is, and this is sufficient to prove that it relates to society but not to the economy. So what you are defining with your three axioms is the subject matter of sociology but not economics. You make the same economics-is-a-social-science mistake as Orthodoxy and traditional Heterodoxy.

Note that there is NO way that leads from the understanding of human behavior to the understanding of the behavior of the economic system. All human-centered approaches invariably crash against the methodological wall of the Fallacy of Composition. In other words: If it isn’t macro-axiomatized, it isn’t economics.