September 24, 2018

Economics as tireless production of proto-scientific garbage: inflation theory as an example

Comment on Brian Romanchuk on ‘Primer: Understanding The Post-Keynesian Rejection Of Mainstream Inflation Theory’

Blog-Reference and Blog-Reference and Blog-Reference

Economics is a failed/fake science or what Feynman called a cargo cult science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit ― the pivotal concept of the subject matter ― wrong. The pluralism of provably false theories is evidence for the representative economist’s scientific incompetence.

After 200+ years, there is still no such thing as a valid profit-, employment-, or inflation theory, there is always a whole bunch of theories/models and everyone is free to pick the one that suits him politically. This guarantees that economics remains what it is since the founding fathers: a brain-dead talk-show.

Brian Romanchuk gives a vivid description of how economists produce their proto-scientific garbage: “So imagine that your boss tells you to come up with ‘an inflation model’ for some country (which is a pretty common demand for employees of central banks or investment firms). According to the Post-Keynesian theory, the ‘correct’ answer is to respond that inflation is a historical accident. However, I must point out that the theoretically correct answer is also an extremely career-limiting one, so any employee stuck in that particular situation needs to figure out what their superiors want to see, and give them exactly that (even if the model stinks).”

This characterization of the representative economist fits the definition of a pseudo-inquirer: “A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent.” (Haack)

There is no use to untangle the multiple idiocies in Brian Romanchuk’s treatment of inflation theory. What has to be done is to replace his blather with the scientifically correct approach.

In order to go back to the basics, the elementary production-consumption economy is for a start clearly defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (profit/loss Qm≡C−Yw, saving/dissaving Sm≡Yw−C).

Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market-clearing price is derived for a start as P=W/R (i). So, the macroeconomic price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R.

The average stock of transaction money follows for a start as M=κYw, with κ determined by the payment pattern. In other words, the quantity of money M is determined by the AUTONOMOUS transactions of the household and business sector and created out of nothing by the central bank. This, to begin with, kills the commonplace Quantity Theory of inflation.#1, #2

The market-clearing price is given in the general case with the macroeconomic Law of Supply and Demand P = ρEW⁄R (ii), with ρE≡C/Yw.#3 An expenditure ratio ρE greater than 1 indicates credit expansion = dissaving, a ratio ρE less than 1 the opposite. In the initial period ρE=1, i.e. the household sector’s budget is balanced. The ratio ρE establishes the link between the product market and the money/capital market.

Now we have deficit spending, i.e. ρE greater 1, yields a price hike. If deficit spending is repeated period after period, the price remains on the elevated level but there is NO inflation. No matter how long the household sector’s debt increases, there is NO accelerated price increase. The same holds for the government sector.#4

The macroeconomic Law of Supply and Demand makes it clear that inflation only occurs if the wage rate W increases in successive periods faster than productivity R. This can happen at ANY employment level. It is NOT a precondition that employment is close to the capacity limit. This is merely a false interpretation of the original Phillips Curve.#5

The explanation for the fact that inflation in the USA is since some time below the FED’s target value of 2 percent is that the rate of change of the average wage rate has been lower than the rate of change of productivity. Things become a bit more complex, of course, when foreign trade, investment etcetera are taken into account. This does not change the fact that the core of inflation theory is given with eq. (ii). This tiny equation fully replaces Brian Romanchuk’s gigantic heap of proto-scientific garbage.

Egmont Kakarot-Handtke

#1 Inflation: back to basics
#2 Attention: there are THREE types of inflation
#3 Wikimedia AXEC101 Macroeconomic Law of Supply and Demand

#4 Gov-Deficits do NOT cause inflation
#5 NAIRU, wage-led growth, and Samuelson's Dyscalculia

REPLY to Joe Leote, Jerry Brown on Sep 26

You are obviously deep in the woods. The issue is inflation theory, but now you are at employment theory. The former has already been treated above, for the latter see
Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster
Essentials of Constructive Heterodoxy: Employment

It would be a good thing if economists could get economic theory right before they pester the world with their brain-dead policy proposals: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum) … or senseless blather.

REPLY to Crossover on Sep 26

You say: “There is also the ‘structuralist’ approach to inflation.” Indeed, almost everybody has an opinion about inflation. The problem is that the goal of science is NOT to have many contradicting opinions but the one materially/formally consistent theory: “That the settlement of opinion is the sole end of inquiry is a very important proposition.” (Peirce)

Post-Keynesianism has been refuted long ago,#1 hence there is no use to try to reanimate post-Keynesian inflation theory or to produce one more roll of proto-scientific garbage.

#1 Why Post Keynesianism Is Not Yet a Science


REPLY to Brian Romanchuk on Sep 28 and Blog-Reference

You say: “Within modern conventional economics, there is an aversion to discussing the division of national income. (Back when economics was ‘political economy,’ this was not the case.) Standard mainstream models assume that wages and prices are determined by marginal considerations, and so the ratio between wages and prices is fixed by the shape of the production function. Conversely, post-Keynesian economics is entirely based on wage and profit shares. Although I did not discuss pricing in the articles, I would refer the reader back to my (three-part) primer on the Kalecki Profit Equation.”

There are three lethal facts to note with regard to your approach:
• The profit theory is false since Adam Smith and because of this, distribution theory is false, too. This includes Post-Keynesianism.#1, #2, #3, #4
• Your ‘very simple economic model, in which there is just a business sector and a household sector’ is a good start except for the fact that ‘Profits are equal to the dividends paid’.#5
• Because profit is ill-defined, income is ill-defined, and by consequence, saving is ill-defined. Monetary profit, to begin with, is NOT a flow of income like wage income but the difference of flows. Distributed profit is income but profit is NOT income. Distributed profit and profit is NOT the same thing. By consequence, total income is NOT the sum of wages and profits, which in turn means that there is NO “profit share of income” and by consequence no “wage share of income”.#6

This means that the sequel to your inflation post is also vacuous blather because all is based on false premises. Your profit theory is provably false.#7 Therefore, your distribution and inflation theory are false, too. What you still have to realize is that Orthodoxy is dead and traditional Heterodoxy including Post-Keynesianism is dead and that the necessary paradigm shift means to leave this heap of proto-scientific garbage behind and to move on to Constructive Heterodoxy.#8

#1 The Profit Theory is False Since Adam Smith. What About the True Distribution Theory?
#2 Ricardo, too, got profit theory wrong
#3 The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment
#4 Why Post Keynesianism Is Not Yet a Science
#5 The Emergence of Profit and Interest in the Monetary Circuit
#6 There is NO such thing as a “labor share of income”
#7 Truth by definition? The Profit Theory is axiomatically false for 200+ years
#8 For details see cross-references Constructive Heterodoxy


REPLY to Brian Romanchuk on Sep 28 and Blog-Reference

You say: “Fine. When you can convince the accounting profession that paying dividends is an expense, I’ll re-write my text. Deal?”

I wonder, what makes you think that my mission is to convince economists in general and you in particular. The representative economist is a failed/fake scientist and has to be expelled from the sciences as fast as possible. His final resting place is the farthest corner of the Flat-Earth-Cemetery.

My mission is NOT to convince you of anything but to prove that you are too stupid for the elementary mathematics that underlies profit- and distribution theory.

For the correct treatment of distributed profit in National Accounting see
The Common Error of Common Sense: An Essential Rectification of the Accounting Approach.

For the correct treatment of profit and distributed profit in distribution theory see
Income Distribution, Profit, and Real Shares.

Quod erat demonstrandum.

REPLY to stone on Oct 1

You say: “If there were profit sharing arrangements with workers, then how might that affect inflation?”

If you were a serious researcher you would have checked Google and found out that your question has already been answered.#1

Distributed profit is itself a source of profit. The Profit Law for the elementary case of the production-consumption economy reads Qm≡Yd−Sm. Yd is distributed profit.#2

For the case of the investment economy, the Profit Law reads Qre≡I−Sm which is known since Allais.#3 Qre is macroeconomic retained profit.

Profit distribution/spending causes a one-off price hike but NO inflation.#4, #5

Just in case you and Brian Romanchuk start to wonder why you are so badly behind the curve, the problem is NOT in economics but in your goldfish brain and the corresponding complete lack of scientific competence.

#1 Enter in the Google search field “distributed profit Egmont Kakarot-Handtke”
#2 Profit Theory in less than 5 minutes
#3 How Keynes got macro wrong and Allais got it right
#4 The Structural Price Mechanism
#5 The final implosion of MMT


REPLY to Brian Romanchuk on Oct 2 and Blog-Reference

You say: “I forgot what a relable source you are. My bad.”

It is too obvious that you are a fake mathematician. A genuine mathematician does not care at all about “reliability” or “credibility” or other subjective social criteria but alone about objective proof.

If you had done the routine job of a competent scientist you would have found out two things:
(i) The equation Qre≡I−Sm is logically true given the correct macroeconomic axioms and is objectively testable because all variables are measurable with the precision of two decimal places.
(ii) That this equation has been derived independently by Allais on a different route.#1

According to Wikipedia, Allais was a major proponent of mathematical economics and as a winner of the economics Nobel in 1988 he certainly satisfies your standard of “reliability”.

So, what you would have done as a genuine mathematician is to check the references and then to perform a little exercise in elementary algebra. The fact is that you are a scientifically incompetent blatherer.

#1 How Keynes got macro wrong and Allais got it right

REPLY to Brian Romanchuk on Oct 2

You say: “I suggest that you give this article a rest. Please wait until I write another article before regurgitating your stories.”

There is no need to produce another heap of proto-scientific garbage. Either you present the proof that the Allais/AXEC equation Qre≡I−Sm is materially/logically inconsistent or you shut up completely.

Keynesianism and I=S/IS-LM are dead for 80+ years but the representative economist still doesn’t get it.#1,#2 There is no refutation of the axiomatically correct Profit Law, though.#3 So, what should anybody wait for? Failed/fake scientists are simply left behind the curve.#4

#1 Why Post Keynesianism Is Not Yet a Science
#2 Economists simply don’t get it
#3 Go! ― test the Profit and Employment Law
#4 Forget mainstream economics, scrap MMT, move on to the new Paradigm