Occasional X: How it works (DXLIV)

“Thomas Piketty built a global reputation on a single, seductive claim: capital accumulates faster than the economy grows, causing wealth to concentrate permanently at the top, and only aggressive redistribution fixes this. … But the entire foundation is rotten. Piketty's central formula, r > g (the return on capital exceeds economic growth), relies on projecting historical capital returns forward indefinitely.” (Handre) Let's generalize: both Piketty and Handre don't understand the investment cycle. The foundational error of legacy economics consists of the fact that the representative economist does not understand profit. As a logical consequence, distribution theory, monetary theory, value theory, etc. have been false since the Founding Fathers. To this day, economics is not a science because it does not get the foundational concepts right. Macroeconomics has always been axiomatically false. It has to be rectified first. This requires a Paradigm Shift. In the following, the problem is reduced to the bare bones. The new axiom set is given in lines 1-3 as shown in the table AXEC243a ⇓ The condition of market-clearing, i.e., X=O, is introduced in line 5. The condition defines the analytical causality. The market-clearing price P is here the dependent variable and is given for the specific and the general case in lines 5, 13, and 17. With the condition of budget-balancing added, i.e., Ec=Yw, that is ρEc=1, the price P is equal to unit wage costs W/R in line 5. Macroeconomic profit Qm is zero in line 7. In the most elementary case, the market-clearing price P moves with unit wage costs W/R. The workers always get the whole product O. Their real wage is equal to the productivity, i.e., W/P=R. General wage increases are pointless. The worker's living standard depends alone on the productivity R. The profit Qm for the business sector is zero. Price increases can come only from wage rate increases or from productivity decreases. The quantity of money is not a price determinant. The elementary production-consumption economy is then split into two equal firms. Thus, microeconomics and macroeconomics are consistent. The differentiated economy is given in the general form with lines 10-13. For a start, the two firms are equal in all respects. The market-clearing price is equal for both. Now, firm 1 produces the consumption good as before. Firm 2 produces an investment good instead (line 16). The households reduce their consumption spending, i.e., they save (line 16). Instead, the business sector buys the output of firm 2 with Ei1. The amount is equal to the former consumption expenditures, i.e., Ei1=Ec0. In this special case of the synchronous investment cycle, saving equals investment. However, the saving is done by the household sector, and the investment is done by the business sector. It is assumed here that the business sector takes credit from the banking sub-sector, and the household sector deposits its saving. Thus, the banking sub-sector's balance sheet says, in the old notation I=S, in the new notation Ei1=Sm1. It seems that the saving of the household sector finances the investment expenditures of the business sector. In fact, the two amounts are independent of each other and are only equal in the limiting case of a perfectly synchronous investment cycle. The profits of both firms are zero as before. In period 2, the investment goods are used for the production of the consumption goods in both firms. Firm 2 switches back from investment goods production to consumption goods production. The input of investment goods increases the productivity of the consumption goods production, i.e., R2>R0. Accordingly, the output increases with an unchanged total labor input L, compared to period 0. The productivity effect alone lowers the market-clearing price. However, the nominal demand increases because the savers of period 1 dissave in period 2. The resulting effect on the market-clearing price depends on the relative strengths of the two effects (line 17). It is assumed for the moment that the market-clearing price remains unchanged, i.e., Pc3=Pc0. In this case, the investment cycle produces a pure time transfer of the consumption goods from period 1 to period 2. Only if the price is lower do the saver-households get more in real terms. Saving in period 1 is 'rewarded' with more consumption goods in period 2, if the productivity effect is large enough. This increase can be interpreted as a real interest rate. However, the households that have not saved also benefit from the productivity effect in the form of a lower market-clearing price (line 17). Because the household sector dissaves, the business sector now makes a profit (line 18). Because the investment goods are used up in period 2, the depreciation is equal to the monetary profit Qm, and the net profit is zero. Over the whole synchronous investment cycle, the business sector's net profit is zero. Macroeconomically, the productivity effect does not translate into a profit effect. Only if one firm can increase its productivity and the others can not, this increase its profit. This is a partial effect that cannot be generalized. It leads to the intellectual shortcut that a productivity increase always means a profit increase. This is the typical microeconomic Fallacy of Composition. What remains is the productivity effect. The household sector benefits only if the productivity effect overcomes the dissaving effect. In this case, all households are 'rewarded', not only the savers/ dissavers. For the saving/dissaving households, a real interest rate can be calculated. This interest rate has nothing to do with the interest rate for the investment credit and the interest rate for saving deposits. As a consequence, the banking credit interest rate does not follow from the productivity effect of the investment. The difference between credit interest and deposit interest is, in the elementary case, equal to the bank's wage bill. The first conclusion from the synchronous investment cycle is that the accustomed business cycle theories are conceptually defective. A growing capital stock does not increase macroeconomic profit over the complete investment cycle. Only if one firm increases its capital stock and its productivity, its profit increases. However, because the market-clearing price decreases because of the productivity effect, the loss in firm 2 increases also. If firm 2 cannot also increase its productivity, it will go bankrupt. Thus, monopolization increases. Conclusion: Economists habitually confound partial and total effects. This is the Fallacy of Composition. In a synchronous investment cycle, the sum of macroeconomic net profit is zero. 'Piketty's central formula, r > g (the return on capital exceeds economic growth)' is provably false, because macroeconomic profit is produced by private/public deficit spending, i.e., not by the growth of capital but the growth of debt.

— AXEC (@EgmontHandtke) November 14, 2026