September 12, 2020

Bang — the representative economist and supply-demand-equilibrium are dead

Comment on Brian Albrecht on ‘You'll have to pry supply and demand from my cold, dead hands’*

Walrasianism, Keynesianism, Marxianism, Austrianism, MMT, and Pluralism are mutually contradictory, axiomatically false, materially/formally inconsistent, and all get profit ― the foundational concept of economics ― wrong. Because of the foundational blunder, the analytical superstructure of economics is false. Economics is failed/fake science.#1 This includes, of course, supply-demand-equilibrium, the one-graph-fits-all explanation of what happens in the economy.

Whether the ‘Totem of the Micro’ which consists of ill-founded marginalistic curves, has scientific value has often been questioned.#2-#10

• “The primitive apparatus of the theory of supply and demand is scientific. But the scientific achievement is so modest, and common sense and scientific knowledge are logically such close neighbors in this case, that any assertion about the precise point at which the one turned into the other must of necessity remain arbitrary.” (Schumpeter 1954)
• “You can make even a parrot into a learned political economist – all he must learn are the two words ‘supply’ and ‘demand’.” (Anonymous in Samuelson 1973)
• “You cannot teach a parrot to be an economist simply by teaching it to say ‘supply’ and ‘demand’.” (Anonymous in Samuelson 2010)

The genuine scientists among economists are well aware of the failure of the overarching general equilibrium theory and acknowledge the need for a Paradigm Shift: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al. 1990)

This, though, is not how things play out in economics because the vast majority of economists are either stupid or corrupt or both. Economists either apply willful ignorance or come up with silly excuses.#11 Morgenstern criticized this back in 1941: “In economics we should strive to proceed, wherever we can, exactly according to the standards of the other, more advanced, sciences, where it is not possible, once an issue has been decided, to continue to write about it as if nothing had happened.”

Refuted theories are not discarded but stubbornly recycled in Econ 101. The disgrace of economics consists of teaching generation after generation approaches that are provably false at the level of elementary algebra.#12

Brian Albrecht has heard about the failure of economics in general and of supply-demand-equilibrium in particular but that does not stop him: “I’m kicking this shindig off with a simple defense of (the increasingly scoffed at by the loudest voices online) supply and demand. It seems silly to need to defend supply and demand within economics circles. But it is 2020… tl;dr We can’t forget how much supply and demand explains about labor markets, especially when teaching students in their first economics course.”

Brian Albrecht does not know that without valid scientific foundations, economic policy guidance is something between worthless and socially disastrous: “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 1991)

To this day, economists do NOT have the true theory. Supply-demand-equilibrium has never been more than educated common sense. Its scientific value is zero. There is a fast and easy way to determine the scientific value of a theory/model. One has to look at what the theory/model says about profit. Profit is the pivot of economics, if profit is false the whole approach is false.#13

Now, how often does the word profit appear in Brian Albrecht's explanation of supply and demand? Not at all, zero! And this tells one without going into detail that Brian Albrecht is one of the many brain-dead blatherers who populate economics and are the very cause for the unassailable fact that economics is for 200+ years now a failed/fake science.

The right thing to do is to bury supply-demand-equilibrium at the Flat-Earth Cemetery and start anew. In methodological jargon, this is called a Paradigm Shift. More specifically, one has to move from provably false Walrasian microfoundations and provably false Keynesian macrofoundations to true macrofoundations.#14

This, though, is entirely beyond the capacities of the representative economist. The only thing they can do is sell their obsolete stuff to mentally retarded students: “We are trying to keep this lighthearted and fun while still discussing important economic ideas. We hope you do too.” Of course, the students do. The history of religion and the entertainment industry proves that young people readily accept any absurdity and stick to it until the end of their lives.

So, what does the correct Law of Supply and Demand look like? It is NOT derived from microfoundations because these end with methodological necessity in the Fallacy of Composition. There is no way to come from microfoundations to an understanding of how the economy works.

Here are the basics of the macrofoundations approach.#15 The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household sector 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) Ec=PX consumption expenditure Ec is equal to price P times quantity bought/sold X.

Under the conditions of market-clearing X=O and budget-balancing Ec=Yw in each period, the price as the dependent variable is given by P=W/R (1a). The price is determined by the wage rate W, which takes the role of the nominal numéraire, and the productivity R. This is the most elementary case.

The macroeconomic Law of Supply and Demand (1a) implies W/P=R (1b), i.e. the real wage is always equal to the productivity no matter how the wage rate W is set or how long the working time L is. Full employment is possible, and the workers always get the whole product O. The workers' living standard depends ultimately on productivity.

The logical next steps are (i) to skip the conditions of market-clearing and budget-balancing, (ii) to differentiate the business sector into multiple firms and markets, and to determine the price structure.

For the time being, real balances are excluded, i.e. it holds X=O. The condition of budget-balancing, i.e. C=Yw, is now skipped. The monetary saving/dissaving of the household sector is defined as S≡Yw−Ec. The monetary profit/loss of the business sector is defined as Q≡Ec−Yw. Ergo Q≡−S.

The balances add up to zero. The mirror image of household sector saving S is business sector loss −Q. The mirror image of household sector dissaving (-S) is business sector profit Q. Q≡−S is the elementary version of the macroeconomic Profit Law.

Instant ramifications: (i) Because the mirror image of saving is loss Keynes' I=S is false, (ii) ALL IS-LM models are false, (iii) Post-Keynesianism in ALL variants is false.

For the macroeconomic Law of Supply and Demand follows P=ρE W/R with ρE≡Ec/Yw. This Law becomes a bit more complex when differentiated for an arbitrary number of firms/markets.

The point to grasp is that the Law of Supply and Demand has to be derived top-down from macrofoundations and NOT bottom-up from microfoundations and silly behavioral assumptions like utility or profit maximization. Time to pry supply and demand from Brian Albrecht's cold, dead hands.

Egmont Kakarot-Handtke

#10 Ch. 3 Market interdependence in Sovereign Economics
#13 Profit


For more about supply-demand-equilibrium see AXECquery.