November 4, 2020

The GDP-death-blow for the economics profession

“Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period.” And “GDP can be determined in three ways, all of which should, theoretically, give the same result. They are the production (or output or value added) approach, the income approach, or the speculated expenditure approach.” and “The second way of estimating GDP is to use ‘the sum of primary incomes distributed by resident producer units’. If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). GDI should provide the same amount as the expenditure method described later. By definition, GDI is equal to GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies. This method measures GDP by adding incomes that firms pay households for factors of production they hire ― wages for labour, interest for capital, rent for land and profits for entrepreneurship. The US ‘National Income and Expenditure Accounts’ divide incomes into five categories: 
  1. Wages, salaries, and supplementary labour income
  2. Corporate profits
  3. Interest and miscellaneous investment income
  4. Farmers' incomes
  5. Income from non-farm unincorporated businesses
These five income components sum to net domestic income at factor cost”. (Wikipedia)#1

To reduce matters to the core, the list 1-5 is condensed to the straightforward formula National Income = Wages (1) + Profits (2). This formula looks plausible but, in fact, constitutes the foundational blunder of economics to this day. The conceptual blunder invalidates Walrasianism, Keynesianism, Marxianism, Austrianism, MMT, and Pluralism.#2-#6

The fact of the matter is that economists are too stupid for the elementary algebra that underlies macroeconomics. With regard to scientific incompetence, there is NO difference between Orthodoxy and Heterodoxy ― it is the whole of academic economics.

Macroeconomics has to be based on a set of objective and consistent axioms.#7 This is the correct core of premises
(A0) The objectively given and most elementary systemic configuration of 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) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

The price P follows as the dependent variable under the conditions of budget-balancing, i.e. C=Yw, and market-clearing, i.e. X=O, as P=W/R, i.e. the market-clearing price is for a start equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.

By lifting the condition of budget-balancing one gets the saving/dissaving of the household sector as S≡Yw−C and the profit/loss of the business sector as Q≡C−Yw. S and Q are the balances of two flows. It holds Q≡−S, that is, profit of the business sector is equal to dissaving/deficit-spending of the household sector and loss of the business sector is equal to saving of the household sector. This is the most elementary form of the macroeconomic Profit Law.#8-#10

Profit Q is a balance, i.e. the difference of flows, and NOT a flow like wage income Yw. So, profit is NOT income. Economists not only confuse stocks and flows but also balances and flows. The Flow-Balance Inconsistency makes that the whole of established economics is proto-scientific garbage.

It is obvious that the business sector’s loss is something quite different from income. Wage income is a flow from the business sector to the household sector. Loss is the difference between the two flows C and Yw. So it is inadmissible to speak of loss as a type of income. This conceptual blunder is called a category mistake. Wage income and profit are NOT two different forms of income. So, the inexcusable blunder of the representative economist consists of confusing balances and flows.

This blunder carries over to the concept of National Income as given above with 1-5 and thus ruins National Accounting and the concept of GDP. Because the foundational concepts of macroeconomics ― profit and income ― are ill-defined, the whole analytical superstructure of macroeconomics is provably false. Economics is a failed science for 200+ years now.#11

The inescapable Paradigm Shift consists of the move from false microfoundations and false macrofoundations to the true macrofoundations (A1) to (A3).

Egmont Kakarot-Handtke

#7 “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)
#10 Profit
#11 See Ch. 13, The indelible scientific disgrace of economics, in Sovereign Economics

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