July 11, 2018

Truth by definition? The Profit Theory is axiomatically false for 200+ years

Comment on Brian Romanchuk on ‘Primer: The Kalecki Profit Equation (Part I, II)’

Blog-Reference and Blog-Reference

(i) You said in the intro: “This article continues the discussion of the Kalecki Profit Equation. The Kalecki Profit Equation is an account identity (a statement that is true by definition) that determines the level of aggregate business sector profits in terms of other national accounts variables. The full equation is somewhat imposing, so the strategy employed here is to build up the equation by starting off with a simplified model economy that results in a brief equation, then adding new terms progressively.”

(ii) You say in your latest post: “Egmont, the expression ‘I could care less’ best summarises my views on this topic. If a ‘senior MMTer’ wrote something that contradicts standard accounting identities, feel free to take it up with said ‘senior MMTer.’ I cannot recall reading anything like that, so as far as I am concerned, you are beating up on a straw man. (The complaint I saw revolved around MMTers using ‘saving’ to refer to sectoral balances, and not the standard national accounting version. Since ‘saving’ and ‘investing’ are commonly used to refer to things not matching the national accounting definition, I view that as grasping as straws.)”

In (i) you say that you are dealing with “an account identity (a statement that is true by definition)”. In (ii) you say that there are standard accounting identities. Now, the standard identities are also known to be “true by definition”. In fact, this is a very common phrase in economics.

Simple logic tells everyone that wildly different accounting identities cannot all be “true by definition”. Economists have obviously a serious problem with understanding the elementary mathematical logic of accounting. This problem is unsolved since Keynes. After-Keynesians still claim that Keynes’ famous I=S is an accounting identity.#1

Kalecki came up with a quite different accounting identity: “The economy is closed (there is no international trade) and there is no public sector. With these assumptions Kalecki derives the following accounting identity: P+W=Cw+Cp+I where P is the volume of gross profits (profits plus depreciation), W is the volume of total wages, Cp is capitalists’ consumption, Cw is workers’ consumption and I is the gross investment that have been made in the economy. Since we have supposed workers who do not save (that is W=Cw in the preceding equation), we can simplify the two terms and arrive at: P=Cp+I. This is the famous profits equation, which says that profits are equal to the sum of investment and capitalists’ consumption.” (Wikipedia)#2

Kalecki’s profit equation is axiomatically false, that is, beyond repair.#3

In my post ‘The final implosion of MMT’ I came up with the axiomatically correct accounting equation for the most elementary economic configuration, Qm≡−Sm #4, which you commented on with the blog post ‘Fun With Accounting Identities’#5: “An article with the flamboyant title ‘The final implosion of MMT’ by Egmont Kakarot-Handtke caught my eye. As I observed at Mike Norman Economics, this was probably just an attempt to troll people. That said, I think it provides another useful example of national accounting works (or does not work...).”

You did not get the point then and I commented: “Which part of Qm≡−Sm do you not understand? The equation says: at the heart of national income accounting is an identity — the business sector’s deficit (surplus) equals the household sector’s surplus (deficit).” and summarized “The current state of economics is that national accounting is provably false and that economic theory is axiomatically defective and that the ‘throng of superfluous economists’ (including Brian Romanchuk) has no clue and cannot rise above brain-dead blathering.”

Now, your post ‘Primer: The Kalecki Profit Equation (Part I)’ starts with (Model 1 Profits) = −(Household savings), in symbols, Qm≡ −Sm.

In principle, it is a good thing that you corrected your false assertions about macroeconomic accounting and adopted the axiomatically correct macroeconomic Profit Law. However, you are deceiving the general reader by attributing it to Kalecki.

I hereby inform you publicly that false attribution not only constitutes a violation of the standards of scientific discussion/publication but also of Wikimedia’s ‘Creative Commons Attribution-Share Alike 4.0 International’ as well as the International Copyright © and Trademark ® Laws. The correct attribution of the Model 1 to Model 5 profit equations is to AXEC/Egmont Kakarot-Handtke.#6, #7, #8

Egmont Kakarot-Handtke

#1 For details of the big picture see cross-references Refutation of I=S
#2 Wikipedia Michał Kalecki The profit equation
#3 Refutation of Kalecki’s profit equation:
#4 AXEC Oct 31, 2016, The final implosion of MMT
#5 BondEconomics Nov 1, 2016, Fun With Accounting Identities
#6 Rectification of MMT macro accounting
#7 DSGE and profit―forget it! MMT and profit―forget it!
#8 Keynes’s Missing Axioms

Immediately preceding MMT: How mathematical incompetence helps the Kelton-Fraud.